The opinion of the court was delivered by: LUONGO
George A. Davis, Inc., a Pennsylvania corporation, brought this diversity action against three other corporations, seeking to recover damages for (1) breach of contract, (2) disparagement, or "trade libel," and (3) intentional interference with contractual relations. Two of the defendants, Johnson Wax Associates, Inc., a Delaware corporation, and its wholly-owned subsidiary, Camp Trails Company, also a Delaware corporation, move to dismiss the complaint for failure to state a claim. Fed. R. Civ. P. 12(b)(6). The remaining defendant, Maguire/Lemay Associates, Inc., a Massachusetts corporation, moves to dismiss the complaint on a number of grounds, including lack of personal jurisdiction, improper venue, and failure to state a claim. Fed. R. Civ. P. 12(b)(2), (3), (6). For the reasons hereafter stated, I conclude that the contract claims must be dismissed as to Johnson Wax Associates, and that the entire complaint must be dismissed as to Maguire/Lemay Associates.
JOINT MOTIONS OF CAMP TRAILS AND JOHNSON WAX
For the purposes of these motions to dismiss, the well-pleaded factual allegations of the amended
complaint must be taken as true. Cruz v. Beto, 405 U.S. 319, 322, 31 L. Ed. 2d 263, 92 S. Ct. 1079 (1972) (per curiam); 2A Moore's Federal Practice P 12.08 at 2266-67 (2d ed. 1948). So considered, the facts in this case may be summarized as follows: Through an exchange of letters in June of 1966, the plaintiff, George A. Davis, Inc., entered into an agreement with Camp Trails, a division of Mechanical Products Company (an Arizona corporation), pursuant to which plaintiff became the "exclusive sales representative and manufacturer's agent in and for all New England and Mid-Atlantic States, Maryland, and Washington, D.C.," for Camp Trails' line of backpacking and camping equipment. Complaint para. 3. Plaintiff was to receive a commission "on all backpacking equipment sold by it or [by] others" in its exclusive territory. Id. P 4. The agreement was terminable by either party on sixty days' notice. Several years later, Camp Trails Company, a wholly-owned subsidiary of defendant Johnson Wax Associates, Inc., assumed the obligations (under this agreement) of Camp Trails, a division of Mechanical Products Company. Id. P 3.
Count I of the complaint, which sounds in contract, is based on the following additional facts. By a letter dated May 27, 1976, defendant Camp Trails Company (hereinafter Camp Trails) terminated its agreement with the plaintiff "effective June 30, 1976," in violation of the sixty-day notice provision, "thereby wrongfully preventing [the plaintiff] from approaching prospective new customers and earning additional commissions and rights to commissions . .. for the full 60 days after notice of termination." Id. P 5. The next day, again by letter, defendant Camp Trails modified the termination by agreeing to pay commissions to the plaintiff on orders that Camp Trails received by August 31, 1976. Exhibit C to Complaint. This arrangement "[terminated] effective August 31, 1976 [the plaintiff's] right to commissions on all orders from the customers procured by" it for Camp Trails. Complaint para. 6. After August 31, 1976, defendant Camp Trails and Johnson Wax wrongfully "refused to pay to [the plaintiff] commissions on orders taken by [defendant Camp Trails] from those customers originally procured by [the plaintiff]," and "refused to compensate [the plaintiff] for the value of [its] efforts and [its] success in building up the Camp Trails product line in [its] territory." Id. pp. 9, 10.
Count II of the complaint, which also sounds in contract, is based on the failure of defendants Camp Trails and Johnson Wax to pay to the plaintiff "commissions due from sales made in the State of New Jersey by one Mel Mittler, the New York City Representative, during the period beginning the summer of 1972 and continuing through and beyond January 1, 1973 when Camp Trails did unilaterally reform [the plaintiff's] territorial privileges." Id. P 12.
Count III of the complaint, which sounds in tort, is based on a letter circulated in June of 1976 by defendants Camp Trails and Johnson Wax that was "understood by members of the trade to imply false and defamatory judgments concerning an unsatisfactory change in the quality of services performed by [the plaintiff]." Id. P 14. This letter, in conjunction with false statements made by defendants to Camp Trails' customers, caused the plaintiff "to suffer damage to [its] business reputation among these many firms of the trade and loss of goodwill." Id. P 15.
Count IV of the complaint, which also sounds in tort, is the only count that also runs against defendant Maguire/Lemay Associates, Inc., the firm that succeeded the plaintiff as Camp Trails' agent and representative. The complaint alleges that the three defendants maliciously performed certain acts in furtherance of a conspiracy to deprive the plaintiff of its employment with Camp Trails and to cause Maguire/Lemay Associates to succeed the plaintiff in that capacity.
With respect to counts I and II of the complaint, which sound in contract, Camp Trails initially argued that the plaintiff contracted in 1966 with the Camp Trails division of Mechanical Products Company, rather than with defendant Camp Trails Company, which was formed in 1972. Joint Memorandum of Law (Document No. 5) at 5-6. "Without some allegation tying defendant Camp Trails . . . to the earlier agreement, no claim can be sustained against it on either Count I or Count II . . ., both of which allege breach of the 1966 agreement." Id. 6. However, the plaintiff has since filed an amended complaint that explicitly alleges that defendant Camp Trails assumed "all obligations" under the contract. Complaint para. 3. The argument is thus unavailing.
Defendant Johnson Wax further argues, with respect to counts I and II, that it entered into no contract with the plaintiff and that it cannot be held liable for any breach of contract committed by its wholly-owned subsidiary, defendant Camp Trails. Joint Memorandum of Law (Document No. 5) at 3-5. The plaintiff, conceding that Johnson Wax was not a party to the contract in issue, nevertheless urges that defendant Camp Trails was and is a "mere instrumentality" of its parent corporation, Johnson Wax, and that Johnson Wax therefore may properly be held liable on that contract. Memorandum of Law in Opposition to Defendants' Joint Motion (Document No. 12) at 2-4.
Ordinarily, of course, a stockholder is not liable on contracts entered into by the corporation, even where that stockholder is the parent corporation and owns all outstanding shares in the subsidiary that entered into the contract. See 13A W. Fletcher, Cyclopedia of the Law of Private Corporations §§ 6213, 6222 at 33 (1961 ed.). The plaintiff contends, however, that the so-called "instrumentality rule," often traced to Lowendahl v. Baltimore & O.R.R., 247 App. Div. 144, 287 N.Y.S. 62, aff'd, 272 N.Y. 360, 6 N.E.2d 56, 290 N.Y.S. (1936), permits a court to pierce the corporate veil and impose liability on the parent corporation for the debts of a subsidiary that is a "mere instrumentality" of the parent. Johnson Wax, by way of response, argues that the "instrumentality rule" applies only where the subsidiary corporation has engaged in fraudulent, tortious, or criminal conduct, as distinguished from simple breach of contract.
In resolving this issue, I "start from the general rule that the corporate entity should be recognized and upheld, unless specific unusual circumstances call for an exception." Zubik v. Zubik, 384 F.2d 267, 273 (3d Cir.) (citation omitted), cert. denied, 390 U.S. 988, 19 L. Ed. 2d 1291, 88 S. Ct. 1183 (1967); see Technograph Printed Circuits, Ltd. v. Epsco, Inc., 224 F. Supp. 260, 263-64 (E.D. Pa. 1963). Thus, absent a compelling basis for departing from the general rule, Camp Trails, the corporation, rather than Johnson Wax, the sole shareholder, is liable for any breach of contract. In the Third Circuit's formulation, "the appropriate occasion for disregarding the corporate existence occurs when the court must prevent fraud, illegality, or injustice, or when recognition of the corporate entity would defeat public policy or shield someone from liability for a crime." Zubik v. Zubik, supra, 384 F.2d at 272 (citations omitted).
The plaintiff, however, does not attempt to bring the present action within this formulation; it alleges no fraud, no illegality, no undercapitalization, nor anything else to distinguish this case from the garden-variety contract case. Nor does the plaintiff cite a single decision in which, despite the absence of fraud or illegality, the "instrumentality rule" was applied to allow recovery against the parent corporation on a contract entered into by the subsidiary.
Under the circumstances, this case is controlled by Chengelis v. Cenco Instruments Corp., 386 F. Supp. 862 (W.D. Pa.), aff'd mem., 523 F.2d 1050 (3d Cir. 1975). The plaintiffs in Chengelis entered into three contracts, including a royalty agreement, with Chemlime Corporation, which they knew to be a wholly-owned subsidiary of Cenco Instruments Corp. Following an alleged breach of the royalty agreement, they brought a diversity action against Cenco, the parent corporation, arguing that Chemlime was merely Cenco's "alter ego." Judge Weber, apparently applying Pennsylvania law, wrote:
"There is abundant evidence in the record to show a close relationship between Cenco and Chemlime. We do not reach the question of whether the evidence is sufficient to establish the 'alter ego' relationship argued for by plaintiffs, however, because there is no proof that the corporate form of the subsidiary was used by the defendant to perpetrate a fraud or promote an injustice akin to fraud. Absent the element of fraud or injustice akin to fraud, we cannot disregard the corporate structure of Chemlime and impose liability on its parent, Cenco . . ..
Based on this approach to the so-called "instrumentality rule," Judge Weber entered judgment for defendant Cenco following a nonjury trial; the court of appeals affirmed without opinion. 523 F.2d 1050 (3d Cir. 1975).
True, the present action is before me on a pretrial motion to dismiss, whereas in Chengelis, Judge Weber had the benefit of a factual record developed at trial. Nevertheless, as noted earlier, the complaint here is utterly devoid of allegations that, if proved, would support application of the "instrumentality rule" to Johnson Wax. Cf. Fed. R. Civ. P. 9(b) ("In all averments of fraud . . ., the circumstances constituting fraud . . . shall be stated with particularity."). Dismissal under Rule 12(b)(6) of counts I and II of the complaint as to Johnson Wax is therefore appropriate. This dismissal is without prejudice to the plaintiff's right to file an amended complaint containing further allegations pertinent to the application of the "instrumentality rule" in this case.
With respect to count III of the complaint, which sets out a claim for disparagement, or "trade libel," Camp Trails and Johnson Wax again seek dismissal for failure to state a claim. Their position is simply that the complained-of letter sent to Camp Trails' customers "could not be found to be libelous under any possible set of facts." Joint Memorandum of Law at 3. The letter, sent by J. Kevin Newman, Camp Trails' sales manager, reads as follows:
Effective June 30, 1976, George A. Davis, Inc., of Levittown, Pennsylvania, will no longer be representing Camp Trails Co. in your area. Our association with the George Davis group has extended over many years and we regret having to make this change at this time.
Please send any fill in orders directly to our Phoenix factory since the stock from Mr. Davis' Levittown warehouse will be shipped back out ...