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NORTHERN ILL. GAS CO. v. TOTAL ENERGY LEASING CORP.

November 28, 1980

NORTHERN ILLINOIS GAS COMPANY, AN ILLINOIS CORPORATION, PLAINTIFF,
v.
TOTAL ENERGY LEASING CORPORATION, A DELAWARE CORPORATION, DEFENDANT.



The opinion of the court was delivered by: Flaum, District Judge:

MEMORANDUM OPINION

This matter comes before the court on plaintiff Northern Illinois Gas Company's ("NI-GAS") motion for summary judgment on the complaint pursuant to Federal Rule of Civil Procedure 56(c). For the reasons set forth below, the motion for summary judgment on the complaint is granted.

NI-GAS, an Illinois public utility, filed suit against the defendant Total Energy Leasing Corporation ("TELCO"), a Delaware corporation with its principal place of business in New York, based upon diversity of citizenship. See 28 U.S.C. § 1332 (1978). NI-GAS seeks recovery of $45,471.59 for gas sold to a subsidiary of TELCO's, Dixie Energy Corporation ("DEC"), during the period of September 1976 to February 1977. In order to recover this amount, NI-GAS asks this court to "pierce the corporate veil" between TELCO and DEC in order to hold TELCO responsible for the debt of its subsidiary.

The affidavits and depositions of both parties establish the following facts. Prior to 1974, DEC executed contracts with NI-GAS whereby NI-GAS supplied DEC's energy plant at the Dixie Square Shopping Center ("Dixie Square") in Harvey, Illinois. In 1974, TELCO created a wholly-owned subsidiary, Dixie Energy Services Corporation ("DESC"), which purchased one hundred percent of DEC's stock from individual third-party stockholders. (Deposition of George Myrtetus at 10-11.) According to their documents of incorporation, DEC and DESC are engaged in the same business: construction and operation of a power station at Dixie Square. (Id. at 6-8.) DESC, however, apparently serves no function other than the ownership of DEC. (Deposition of Merton Levey at 8.) Thus, TELCO owns all of the stock of DESC which in turn owns all of the stock of DEC. (TELCO Answer to NI-GAS Interrogatory No. 2.)

TELCO, DEC, and DESC have the same officers and directors.*fn1 (TELCO Answer to NI-GAS Interrogatory No. 1.) The officers and directors are: George Myrtetus ("Myrtetus"), president and a director of TELCO, DEC, and DESC; Meyer Steinberg ("Steinberg"), treasurer and a director of TELCO, DEC, and DESC; and Merton Levey ("Levey"), vice-president and a director of TELCO, DEC, and DESC. (Id.) Myrtetus, Steinberg, and Levey receive no compensation or salaries for their positions as officers and directors of DEC and DESC. (TELCO Answer to NI-GAS Interrogatory No. 5(a).) Rather, the officers apparently only receive compensation for their positions as officers and directors of TELCO. Moreover, Steinberg apparently did not know whether he was an officer of DEC and DESC. (Deposition of Meyer Steinberg at 4.) DEC's non-officer employees also were paid directly by TELCO. (Deposition of George Myrtetus at 24-25.) In addition, payroll accounts of all TELCO subsidiaries were centralized in that TELCO had a single account to pay the employees of all subsidiaries. (Id.) Neither DEC nor DESC has ever distributed profits or dividends. (TELCO Answer to NI-GAS Interrogatory No. 4(c).) DESC had no profits or losses from 1974 to 1977. (TELCO Answer to NI-GAS Interrogatory No. 7(c).) The board of directors' meetings for DEC and DESC were held concurrently. (TELCO Answer to NI-GAS Interrogatory No. 6(b); Deposition of George Myrtetus at 16.) There apparently was no formal separation at these meetings between the corporate business of DEC and that of DESC. (Deposition of George Myrtetus at 16.) All of these meetings were held at TELCO's New York office. (TELCO Answer to NI-GAS Interrogatory No. 6(b).) The financial records of DEC and DESC are kept at TELCO's New York office. (TELCO Answer to NI-GAS Interrogatory No. 7(d).) Expenses for trips by the directors on behalf of DEC and DESC were paid by TELCO. (Deposition of George Myrtetus at 57; Deposition of Merton Levey at 55-56.)

DEC has a capitalization of $2,000. (Amended Affidavit of Merton Levey at ¶ 9.) In 1976, two years after TELCO's acquisition of DEC, DEC's capital stock and earned surplus was minus $51,796.15. (TELCO Answer to NI-GAS Interrogatory No. 7(b).) Steinberg loaned $100,000 to DESC for the acquisition of DEC.*fn2 (Deposition of Meyer Steinberg at 7.) This loan was reflected in a note given to Steinberg by TELCO. (Id. at 7-8.) DEC, however, not TELCO, paid approximately $15,000 in interest on Steinberg's loan. (TELCO Deposition Exhibit No. 9.) In 1976, Steinberg issued a check to DEC for $20,000 which was "used to meet operating cost deficits." (Id.) Again, Steinberg received a note for the loan from TELCO. (Id.; Deposition of Meyer Steinberg at 28.) DEC is insolvent. (TELCO Answer to NI-GAS Interrogatories Nos. 7(b) and 7(c).) DEC has assets in the form of a plant and equipment which were owned by DEC prior to TELCO's acquisition of DEC. (Affidavit of Merton Levey, October 1979, at ¶ 7.)

Levey, vice-president of TELCO, DEC, and DESC but compensated only for his position with TELCO, and operating out of TELCO's office in New York, negotiated all service agreements for DEC and supervised billing procedures. (Deposition of Merton Levey at 18.) The only persons authorized to sign checks for DEC were Myrtetus and Steinberg, both persons only compensated for their position with TELCO and operating out of TELCO's New York office.*fn3 (Deposition of George Myrtetus at 58.) No formal financial records of DEC were kept at Dixie Square. (Id. at 59.) DEC customer complaints normally went directly to Levey at TELCO's office in New York. (Deposition of Merton Levey at 50.) Labor negotiations for DEC were conducted by Myrtetus, who was compensated only for his position as president of TELCO and operated out of TELCO's office in New York. (Deposition of George Myrtetus at 59.)

In November 1976, Levey corresponded with J. C. Penney Company ("Penney"), objecting to deductions from Penney's payments and threatening to cut off services to Penney's store at Dixie Square. (TELCO Deposition Exhibit No. 22.) The letter from Levey was written on TELCO stationery and responded to notifications of intended deductions sent by Penney to TELCO. (TELCO Deposition Exhibit No. 25.) In addition, in 1976, Commonwealth Edison provided temporary electric power to Dixie Square and sent billing and correspondence directly to Levey at TELCO. (TELCO Deposition Exhibit No. 26.) In November 1976, letters were sent to the tenants of Dixie Square demanding payment for services and threatening a cutoff of services if payment was not forthcoming. These letters were written on TELCO stationery and signed by Levey simply as "Vice President." (TELCO Deposition Exhibit No. 28; Deposition of Merton Levey at 65-67.) Also in 1976, the purchase order for repairs to a boiler at Dixie Square was sent out on TELCO stationery. (TELCO Deposition Exhibit No. 30; Deposition of Merton Levey at 71.)

Monies for DEC's share of overhead for all TELCO operations were not paid by DEC to TELCO on any regular basis or pursuant to any schedule. (Deposition of George Myrtetus at 20.) There was no contract between DEC and TELCO for the payment of overhead. (Id. at 28.) Several alleged overhead payments by DEC to TELCO were made in the weeks immediately preceding the date when DEC ceased operation. (TELCO Deposition Exhibit No. 10.) While this TELCO memorandum shows certain overhead payments from DEC to TELCO for the period of October 1975 to February 1977,*fn4 other TELCO memoranda show that some of the payments were not in fact overhead but in one instance were transferred at the advice of counsel*fn5 and in another instance in view of the pending demise of DEC.*fn6 (TELCO Deposition Exhibits Nos. 9 and 11; Deposition of Merton Levey at 37.) Moreover, DESC accounts became active after DEC ceased operation, as reflected by monthly payments to DESC by F.W. Woolworth ("Woolworth") of $1,333.33 in March, April, May, June, and July of 1977. (TELCO Deposition Exhibit No. 13.) These amounts correspond to Woolworth's monthly rate for energy services from DEC. (Deposition of George Myrtetus at 45-46.) Myrtetus, president of TELCO, DEC, and DESC, was unable to explain why these amounts belonging to DEC began appearing among the receipts of DESC. (Id. at 46.) Levey, vice-president of TELCO, DEC, and DESC, speculated that the Woolworth payments might have been put into DESC's account so that they could be segregated and not put into DEC and "eaten up . . . [b]y creditors." (Deposition of Merton Levey at 32.)

Federal Rule of Civil Procedure 56(c) provides that summary judgment may be entered in a case "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). The burden is upon the moving party to establish the lack of a triable issue of fact, and all doubts must be resolved against that party. Adickes v. S. H. Kress & Co., 398 U.S. 144, 157, 90 S.Ct. 1598, 1608, 26 L.Ed.2d 142 (1970); Joseph v. Brierton, 431 F. Supp. 50, 52 (N.D.Ill. 1977). The court, however, "has the power to penetrate the allegations of fact in the pleadings and look at any evidential source to determine whether there is an issue of fact to be tried." Kirk v. Home Indemnity Co., 431 F.2d 554, 559 (7th Cir. 1970). Moreover, Federal Rule of Civil Procedure 56(e) provides:

  When a motion for summary judgment is made and
  supported as provided in this rule, an adverse
  party may not rest upon the mere allegations or
  denials of his pleading, but his response by
  affidavits or as otherwise provided in this rule,
  must set forth specific facts showing that there
  is a genuine issue for trial. If he does not so
  respond, summary judgment, if appropriate, shall
  be entered against him.

Fed.R.Civ.P. 56(e).

Recently, in CM Corp. v. Oberer Development Co., 631 F.2d 536 (7th Cir. 1980), the United States Court of Appeals for the Seventh Circuit reiterated the three elements necessary to pierce the corporate veil. The court stated:

  In Turner, this court held that a parent
  corporation would be responsible for the
  obligations of its subsidiary when the subsidiary
  has become its mere instrumentality. In order to
  establish that a parent should be held liable for
  the obligations of its subsidiary, three elements
  must be proved: "control by the parent to such a
  degree that the subsidiary has become its mere
  instrumentality; fraud or wrong by the parent
  through its subsidiary, e. g., torts, violation of
  a statute ...

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