Appeal from the United States District Court for the Northern District of Illinois, Eastern Division No. 82-C-3696, Hubert L. Will, Judge.
Before BAUER and COFFEY, Circuit Judges, and FAIRCHILD, Senior Circuit Judge.
FAIRCHILD, Senior Circuit Judge. Plaintiff Van Dorn Company, d/b/a George A. Milton Can Company (Milton), brought an action alleging breach of contract and fraud against Future Chemical and Oil Corporation (Future), Sovereign Oil Company (Sovereign of Illinois), and Edeward Roth, president of both corporations, to recover monies due Milton for various labels and cans ordered by Future and, in the case of cans, delivered too Sovereign of Illinois. In their answer defendants admitted that Future owned plaintiff $24,088.30 for goods ordered and accepted and the court granted a summary judgment against Future for that amount. Future and Sovereign of Illinois filed a counterclaim alleging a breach of warranty for the cans involved in the fraud count of the original complaint. Jurisdiction was founded on diversity and all parties have treated Illinois law as governing substantive questions. The trial court, sitting without a jury, made findings, dismissed the fraud count of the original complaint, dismissed the cause as to Edward Roth, and dismissed the counterclaim. The summary judgment was modified to include Sovereign of Illinois as jointly and severally liable with Future and to disallow $3,280.00 of art charges. Judgment was entered against Future Chemical and Oil Corporation and Sovereign Oil Company (of Illinois) jointly and severally in the amount of $57,498.62, including the summary judgment. Defendants Future and Sovereign of Illinois appeal and plaintiff Milton cross-appeals.
The issues presented for review are (1) whether the evidence warranted piercing the corporate veil to the extent of disregarding the separate corporate identities of Sovereign of Illinois and Future and treating them as a single corporate entity responsible for the obligations to Milton; (2) whether the court erred in modifying the summary judgment to disallow the art charges; and (3) whether the court erred in not imposing liability on Sovereign of Illinois and Future for cans delivered in excess of the quantity ordered, where defendants were notified of the overshipment, failed to reject the excess cans and Edward Roth promised to pay for the goods delivered.
In 1979, Edward Roth, along with two of his brothers, operated the Therm-X Chemical and Oil Corporation in Commack, New York. Therm-X was in the business of blending, packaging and distributing motor oils and other automotive products. In late 1979, the three brothers each formed separate corporations, Gibson, Tiffany, and Future Chemical and Oil Corporation. Edward Roth was the president and sole shareholder of Future and his sons Jeff and Steven were the other officers of the corporation. Future was capitalized for $50,000. Future was a distributor of motor oil and related products and operated out of the same facilities in Commack as Therm-X. Therm-X continued as an ongoing corporation and owned all of the equipment in the Commack plant. Therm-X did all of the packaging for the three corporations, sold them the filled cans at a profit and then each of the three corporations sold to its own customers. This arrangement lasted about three months when Therm-X ceased to exist as a separate corporation. Gibson, Tiffany, and Future split the remaining Therm-X accounts and did their own packaging at the Commack plant, allocating plant time among the three corporations.
In the spring of 1980, Edward Roth began negotiating to purchase the Sovereign Oil Company, an Illinois corporation, in Bedford Park, Illinois. Sovereign of Illinois was in the business of blending and packaging motor oil, but in the spring of 1980 it was in Chapter 11 bankruptcy proceedings and had been defunct for at least six months. During the negotiation period Sovereign of Illinois did some packaging for Future, with the court's approval, to avoid shutting down the plant. In May of 1980, Rother purchased all of the shares of Sovereign of Illinois for $1.00 and contributed them to Future for $1.00. Thus, Sovereign of Illinois was the wholly-owned subsidiary of Future. Edward Roth was the president of Sovereign of Illinois and his two sons, Jeff and Steven, were its other officers. An initial loan of $600,000 was made to Sovereign of Illinois by National Acceptance Corporation, secured by Roth's personal certificates of deposit. After Roth purchased Sovereign of Illinois it had a negative net worth of approximately $2,000,000.
Sometime after Roth purchased Sovereign of Illinois it began packaging all products distributed by Future and Future ceased doing any packaging at the facilities in Commack. Sovereign of Illinois packaged the product in Chicago, shipped it to Future in New York for distribution and billed Future for the total cost of the product plus a ten percent markup. All transactions of this type between the two corporations were done on a cost plus ten percent basis.
In September of 1981, Sovereign Chemical and Petroleum Corporation (Sovereign of Delaware), a Delaware Corporation, was formed as a holding company. Future's stock was transferred by Roth to Sovereign of Delaware, and Future transferred all Sovereign of Illinois stock to Sovereign of Delaware for $1.00. Thus, Sovereign of Illinois and Future became the wholly-owned subsidiaries of Sovereign of Delaware. Edward Roth was the president and controlling shareholder of Sovereign of Delaware.
In 1982, Roth purchased all of the outstanding stock of an insolvent company which had blending, packaging, and manufacturing facilities in Philadelphia. Roth formed Sovereign Oil of Pennsylvania as another wholly-owned subsidiary of Sovereign of Delaware.
Sometime in 1981 Future began to lose money and it ceased operations entirely in December of 1981. Future continued to collect receivables until 1983, however, paying Steven Roth $65,000 during 1982 for that purpose. During the time Steven Roth was paid by Future he worked a substantial portion of his time at the Sovereign of Pennsylvania plant getting that operation underway without receiving any compensation from Sovereign of Pennsylvania. Future's remaining inventory was transferred to Sovereign of Pennsylvania for $120,000 in April of 1982. Sovereign of Pennsylvania also assumed Future's remaining accounts. The money received for the inventory plus collected receivables was used to pay salaries and expenses of Future, plus debts of Future owed to Edward Roth, Sovereign of Illinois, and Sovereign of Pennsylvania. Future presently has no assets. Sovereign of Illinois fared much better than Future during approximately the same time period. By June of 1981 Sovereign of Illinois had become a profitable operation and by June of 1982 it was solvent.
Plaintiff Van Dorn Company is a manufacturer of metal and composite cans. Through its Milton Can Division, located in New Jersey, plaintiff has been doing business with Therm-X when Edward Roth was an officer of that company. When Future began packaging for itself in Commack it also purchased cans from Milton.
In April 1980 Roth wanted to begin filling cans at the Sovereign of Illinois facility. He had not as yet established a local source for cans and consequently ordered from the plaintiff. Roth placed a telephone order with Milton for one truckload containing 17,000 Walker DOT 3 Brake Fluid cans, 12,000 Walker Carburetor Cleaner cans, 20,000 Walker Gas Octane cans and 20,000 Morak Brake Fluid cans, and another truckload of all Walker DOT 3 Brake Fluid cans (73,000 cans). Both of these truckloads were shipped to Chicago at Roth's instruction. Milton found that it did not have 17,000 Walker DOT 3 Brake Fluid cans in made-up stock at the time of shipment. Consequently, it shipped an additional 9,000 Morak Brake Fluid cans and an additional 9,000 Walker Gas Octane cans to complete the truckload. The excess cans were noted on the invoice sent to Future.
In May 1980 Roth ordered a roll of Whitlock Oil can labels from Milton. At Roth's request plaintiff shipped the labels to the Home Manufacturing Company in Elk Grove Village, Illinois, a local can manufacturer. Evidently the wind of the labels prevented Home Manufacturing from affixing them on cans and Sovereign of Illinois never used the labels.
In August of 1980 Roth ordered Grand Union and Big Star Motor Oil containers from Milton and picked up the containers from Milton's factory in New Jersey with his own trucks. Defendants alleged that these containers were taken to Future in New York while the plaintiff contended that they went to Sovereign of Illinois in Chicago. The trial court found that the cans went to Chicago. These cans were the subject of the court's summary judgment in favor of Milton.
The invoices for all of these shipments were directed to Future Chemical and Oil in New York, not to Sovereign of Illinois or to Ed Roth individually.
In the fall of 1980 the parties ceased doing business with each other. Roth refused to pay for the two April shipments of cans and the May shipment of labels because he contended that Sovereign of Illinois could not use them. The entire shipment of Morak Brake Fluid, Walker Gas Octane and Walker Carburetor cans was in Sovereign of Illinois' warehouse, unused as of the date of trial. Roth testified that the 73,000 DOT 3 cans were unusable due to bad lithography and were disposed of by Sovereign of Illinois. The trial court found that the cans were probably filled by Sovereign of Illinois, however, because of an absence of proof that the cans were bad and because no other ...