Opinion
No. 3:02-CV-0401-L
March 27, 2002
ORDER
Before the court is Plaintiff's First Amended and Application for Temporary Restraining Order, Preliminary Injunction and Permanent Injunction ("Amended Application"), filed March 5, 2002; and Plaintiff EMSI's Motion to Expedite Discovery, filed February 26, 2002. For the reasons stated herein, the Amended Application and Motion to Expedite Discovery are denied as moot.
I. Facts and Procedural Background
Plaintiff Examination Management Services, Inc. ("EMSI") provides paramedical information and examination services to insurance companies. Insurance companies use the information and examination results to assess the risk of providing insurance to potential insureds. EMSI services these companies by contacting with independent paramedical service contractors throughout the count. Defendant Patsy Janzen ("Janzen"), through her company Defendant V P Enterprises, Inc. ("V P, Inc."), was a paramedical services contractor that contracted with EMSI. She operated her service in the Oklahoma City, Oklahoma area.
Janzen began her business relationship with EMSI pursuant to a contract entered into in 1979. The contract contained an exclusivity provision that required Janzen to provide paramedical services only on EMSI's behalf in the Oklahoma City area. The contract provided that Janzen:
The contract, to the extent it is still in effect, is governed by Texas Law. See Appendix to Amended Application ("App.") exh. K, ¶ X.
shall devote [her] efforts in conducting physical examinations for insurance companies exclusively to and for the benefit of the parties to this contract and under the terms of this agreement, and shall not, while this agreement is in effect, engage in conducting physical examinations and surveys for insurance companies under any name other than and for the benefit of [EMSI].
App. exh. K, ¶ IV(J).
The contract also set forth that the "term of this agreement and contract shall be for 5 years commencing on this 1 day of June, 1979. . . . This agreement shall automatically renew, at its expiration date, unless, within sixty (60) days after the expiration date, [Janzen] gives written notice . . . that said party will not renew this agreement." App. exh. K, ¶ III. EMSI contends that this renewal provision has caused the contract to continually renew for five year terms, because Janzen has never given the required notice of cancellation. If this is correct, the current term of the contract will not expire until 2004. Janzen, however, contends that the contract expired in June 1989, because the renewal provision caused the contract to renew for only one five-year period after the original June 1, 1984 expiration date.
When Janzen and EMSI entered the 1979 contract, V P, Inc. was not yet formed, and was not an express party to the contract. The contract therefore provided that Janzen "shall establish a company in the state which [her] office is in as a separate Corporation which will carry all responsibilities as such." App. exh. K, ¶ IV(A). Apparently, this is why V P, Inc. was formed, and once it was formed, the relationship between Janzen, V P, Inc., and EMSI continued until December 2001.
In December 2001, Janzen sent a resignation letter to EMSI, which stated that she would no longer operate as a paramedical contractor effective December 31, 2001. EMSI did not accept her resignation because, as previously stated, it contends the contract has continually renewed in five-year increments, and does not expire until 2004. EMSI then sent a response letter to Janzen, which stated that she could not terminate the contract until the current renewal period expires.
Shortly after this exchange of letters, EMSI allegedly learned that Janzen had agreed to begin performing paramedical services in the Oklahoma City area for EMSI's competitor, Defendant Labone, Inc. ("Labone"). EMSI contends that this action constituted a breach of the exclusivity provision in the 1979 contract, and sent another letter to Janzen, instructing her to discontinue performing paramedical services for Labone. Janzen responded by contending that her contract with EMSI expired in June 1989, and therefore neither she nor V P, Inc. was bound by it. Janzen further responded that V P, Inc. was never bound by the contract because V P, Inc. did not exist when the contract was formed and was not a party to it.
EMSI filed its Original Complaint and Application for Temporary Restraining Order, Preliminary Injunction and Permanent Injunction ("Original Application") on February 26, 2002. It in part sought to enjoin Janzen and V P, Inc. from violating the 1979 contract's exclusivity provision. After EMSI filed the Original Application, it learned that Janzen's daughter and son-in-law, Janet and Danny Stansbury (the "Stansburys"), operated a paramedical services company, Janzen Janzen, Inc ("Janzen, Inc."). EMSI determined that Janzen, Inc., not Janzen or V P, Inc., had entered into the contractual relationship with Labone, and its affiliate company ExamOne World Wide, Inc. ("ExamOne"). EMSI believes that Janzen, Inc. is an alter ego, joint enterprise, or single enterprise with Janzen or V P, Inc., and that Janzen, Inc. was created to allow Janzen and V P, Inc. to usurp the exclusivity provision of the 1979 contract.
EMSI also believes that some combination of Janzen, V P, Inc., and Janzen, Inc., has been improperly billing services attributable to EMSI through Labone. When EMSI's paramedical contractors perform paramedical services, they are supposed to bill the cost of the services through EMSI, by sending billing statements to EMSI. EMSI then collects payment for the services. This allows EMSI to keep a percentage of the billing payment, and forward the remainder of the payment to the paramedical contractor. EMSI believes that Janzen, V P, Inc., or Janzen, Inc. is sending EMSI's billing statements to Labone, so that Labone can convert payments that should be billed through EMSI. EMSI therefore filed its Amended Application on March 5, 2002. EMSI seeks to: 1) enjoin Janzen and V P. Inc., from breaching the 1979 contract's exclusivity provision by using Janzen, Inc. to perform paramedical services for Labone or ExamOne, 2) enjoin Defendants from converting finds, and 3) enjoin Defendants from destroying relevant documents.
By order dated March 13, 2002, the court denied EMSI's Amended Application with respect to destruction of documents. The court therefore will not discuss this issue.
Defendants challenge EMSI's Amended Application in part by contending that Janzen, Inc. is not an alter ego, joint enterprise, or single enterprise with Janzen or V P. Inc. The court sets forth the standard for issuance of a temporary restraining order before evaluating the parties' contentions.
II. Temporary Restraining Order Standard
In Canal Authority of the State of Florida v. Callaway, 489 F.2d 567 (5th Cir. 1974) (en banc), the Fifth Circuit set out the prerequisites for granting injunctive relief. To obtain the extraordinary relief of a temporary restraining order or preliminary injunction, EMSI must establish that (1) there is a substantial likelihood that it will prevail on the merits; (2) there is a substantial threat that irreparable harm will result if the injunction is not granted; (3) the threatened injury outweighs the threatened harm to Defendants; and (4) a preliminary injunction or temporary restraining order will not disserve the public interest. Id. at 572-73; Clark v. Prichard, 812 F.2d 991, 993 (5th Cir. 1987). EMSI must satisfy a cumulative burden of proving each of the four elements enumerated before a temporary restraining order or preliminary injunction can be granted. See Clark, 812 F.2d at 993 ( citing Mississippi Power Light Co. v. United Gas Pipeline, 760 F.2d 618, 621 (5th Cir. 1985)). The court will address whether EMSI's Amended Application meets the foregoing requirements, and begins by evaluating EMSI's claim for breach of the 1979 contract's exclusivity provision.
III. Application
A. Breach of Exclusivity Provision
The first temporary restraining order consideration is whether EMSI has show a substantial likelihood of succeeding on its claim that Janzen and V P, Inc. have breached the 1979 contract's exclusivity provision. Initially, it is necessary to address EMSI's contention that Janzen, Inc. is an alter ego, joint enterprise, or single enterprise with Janzen or V P, Inc. EMSI seeks to enjoin "the Janzen Defendants from performing examination services for Labone and/or Examone in violation of the exclusivity provision in the [c]ontract. . . ." Amended Application at 25. EMSI identifies the "Janzen Defendants" as Janzen, V P, Inc., and Janzen, Inc. See Amended Application at 16. of the Janzen Defendants, Janzen and V P, Inc. are the only parties that may be presently bound by the 1979 contract's exclusivity provision, because they are the only persons that could be parties to the contract. Janzen, Inc. is not a party to the 1979 contract, and allegedly is a separate entity from Janzen or V P, Inc. Janzen, Inc.'s actions therefore can be constrained by the contract only if its actions are attributable to Janzen or V P. Inc. Additionally, Janzen and V P, Inc. are breaching the exclusivity provision only if they are performing paramedical services for entities other than EMSI, or if Janzen Inc.'s actions are attributable to Janzen and V P, Inc. and Janzen Inc. is performing services for entities other than EMSI. Absent one of these scenarios, Janzen, Inc. cannot be bound or affected by the 1979 contract's exclusivity provision, and Janzen and V P, Inc. cannot be in breach of the provision.
The record reflects that Janzen and V P, Inc. are not performing paramedical services for entities other than EMSI. In fact, according to the testimony of Janzen, she and V P. Inc. are not performing any paramedical services because she has retired and discontinued operating V P, Inc. See Temporary Restraining Order Hearing Transcript ("Tr.") at 28, 57, 68. Janzen, Inc. is the entity that is performing paramedical services for the other entities, Labone and Examone. As previously stated, unless Janzen, Inc.'s actions are attributable to Janzen or V P, Inc., Janzen and V P, Inc. cannot be in breach of the exclusivity provision. Janzen, Inc.'s actions will be attributable to Janzen or V P, Inc. if it is a alter ego, joint enterprise, of single enterprise with Janzen or V P, Inc. Accordingly, EMSI can show a substantial likelihood of success on the merits of its claim for breach of the contract's exclusivity provision, only if the court finds satisfactory evidence that Janzen, Inc. is an alter ego, joint enterprise, or single enterprise with Janzen or V P, Inc. The court now turns to each of these matters.
The alter ego doctrine is grounded in principles of corporation law, which dictate that the "corporate form normally insulates shareholders, officers, and directors form liability for corporate obligations; but when these individuals abuse corporate privilege, courts will disregard the corporate fiction and hold them individually liable." Castleberry v. Branscum, 721 S.W.2d 270, 271 (Tex. 1987). Courts "disregard the corporate fiction . . . when the corporate form has been used as part of a basically unfair device to achieve an inequitable result." Id. The alter ego doctrine is "one of the bases for disregarding the corporate fiction: `where a corporation is organized and operated as a mere tool or business conduit of another corporation[,]" or "when there is such unity between corporation and individual that the separateness of the corporation has ceased and holding only the corporation liable would result in injustice." Id. at 272.
EMSI, LabOne, and ExamOne cite Tex. Bus. Corp. Act Ann. art. 2.21(A)(2) (Vernon Supp. 2001), as the applicable authority for a Texas alter ego claim. See EMSI's Brief in Support of its Application for Temporary Restraining Order and Reply to Defendants' Recent Responses ("Brief in Support"), filed March 5, 2002, at 6, n. 2; Tr. at 144. Article 2.21 in relevant part states:
Janzen, V P, Inc, and Janzen, Inc. have not expressed a position on the authority that governs an alter ego claim.
A holder of shares, an owner of any beneficial interest in shares, or a subscriber for shares whose subscription has been accepted, or any affiliate thereof or of the corporation, shall be under no obligation to the corporation or to its obligees with respect to . . . any contractual obligation of the corporation . . . on the basis that the holder, owner, subscriber, or affiliate is or was the alter ego of the corporation . . . unless the obligee demonstrates that the holder, owner, subscriber, or affiliate caused the corporation to be used for the purpose of perpetrating and did perpetrate an actual fraud on the obligee primarily for the direct personal benefit of the holder, owner, subscriber, or affiliate. . . .
Tex. Bus. Corp. Act Ann. art. 2.21(A)(2) (emphasis added). Article 2.21 addresses alter ego considerations relevant to a "holder of shares, and owner of any beneficial interest in shares, or a subscriber for shares whose subscription has been accepted, or any affiliate . . . ." Id.; see also Thrift v. Hubbard, 44 F.3d 348, 354 (5th Cir. 1995) (holding that the "liability imposed under article 2.21 concerns shareholder liability for acts of the corporation in connection with contract claims[.]'") (emphasis in original). Nothing in the record indicates that Janzen or V P, Inc. is a holder of shares, owner of any beneficial interest in shares, subscriber for shares, or affiliate of Janzen Inc. Accordingly, Janzen and V P. Inc. do not fit the categories of persons or entities discussed in article 2.21. The article therefore does not apply to Janzen or V P. Inc., and cannot be the basis for EMSI's alter ego claim.
The version of article 2.21 discussed in Thrift was amended effective September 1, 1997, but the amendment does not alter the fundamental principle, recognized in Thrift, that article 2.21 addresses the liability of shareholders.
Likewise, to the extent Texas recognizes common law alter ego principles, it apparently has applied the doctrine only to hold shareholders or parent corporations liable for a corporation's acts. See Castleberry, 721 S.W.2d at 272 (holding that "Alter ego's rationale is: `if the shareholders themselves disregard the separation of the corporate enterprise, the law will also disregard it in so far as necessary to protect individual and corporate creditors.'"); see also North Am. Van Lines, Inc. v. Emmons, 50 S.W.3d 103, 119 (Tex.App.-Beaumont 2001, no pet.) (holding that the "alter ego doctrine is applied to disregard the corporate fiction when there is such unity between a corporation and its subsidiary that the separateness of the latter has ceased and holding only the subsidiary liable would lead to injustice."). Janzen and V P, Inc. are not shareholders of Janzen, Inc., and Janzen, Inc. is not a subsidiary of V P, Inc. Likewise, Janzen, Inc. is not a shareholder of V P, Inc., and V P, Inc. is not a subsidiary of Janzen, Inc. The alter ego doctrine therefore does not fit the parties' relationship to one another, and the relief sought by EMSI is not consistent with the doctrine. Accordingly, Janzen, Inc.'s actions are not attributable to Janzen or V P, Inc. based on the alter ego doctrine, and EMSI cannot succeed on its alter ego claim. The court next evaluates whether Janzen, Inc.'s actions are attributable to Janzen or V P, Inc. on a joint enterprise theory.
In Texas, "[j]oint enterprise liability makes `each party thereto the agent of the other and thereby to hold each responsible for the negligent act of the other.'" Texas Dep't of Transp. v. Able, 35 S.W.3d 608, 613 (Tex. 2000) (emphasis added). It appears from this authority that joint enterprise liability is specific to negligence law. If this is the case, the theory is not applicable to the present facts because EMSI is not seeking to recover for any alleged negligence.
The court nevertheless sets forth and analyzes the elements of a joint enterprise, in the event the theory extends to the present facts. The elements of a joint enterprise are as follows:
(1) an agreement, express or implied, among the members of the group;
(2) a common purpose to be carried out by the group; (3) a community of pecuniary interest in that purpose, among the members; and (4) an equal right to a voice in the direction of the enterprise, which gives an equal right of control.Id. at 613. As previously stated, Janzen operates V P, Inc., and the Stansburys operate Janzen, Inc. Even assuming for the sake of argument that Janzen and the Stansburys had an express or implied agreement to operate Janzen, Inc. or V P, Inc. for a common purpose, there is no evidence that Janzen and the Stansburys have a shared pecuniary interest, or that the parties have a shared right of control over Janzen, Inc. or V P, Inc.
Regarding a shared pecuniary interest, EMSI has not brought forth any evidence that Janzen and the Stansburys have such an interest, and there is no basis in the record for the court to draw this inference. The Stansburys likely derive pecuniary returns from the operation of Janzen, Inc. because it is their company, but the court heard no evidence during the hearing that Janzen received any pecuniary returns from Janzen, Inc. The court therefore cannot assume that Janzen has a shared pecuniary interest in the operation of Janzen, Inc. Additionally, since the evidence indicates that V P, Inc. is no longer operational, the Stansburys apparently cannot have a pecuniary interest in its operation.
Regarding a shared right of control, Janzen's testimony and the testimony of Janet Stansbury illustrate that Janzen does not share a right to control Janzen, Inc. with the Stansburys. Janzen testified that she has done nothing on behalf of Janzen, Inc. since January 1, 2002; that V P, Inc. has not done anything on behalf of Janzen, Inc. since that date; that she has no intention of returning to the paramedical services business; and that she is not an officer or director of Janzen, Inc. See Tr. at 68, 71. Janet Stansbury testified that Janzen is "no longer a part of [the] business[,]" that Janzen no longer comes to the office, that Janzen does not have an ownership interest in the business, that the Stansburys made the decision to contract with ExamOne, and that they have owned Janzen, Inc.'s stock since January 1, 2002. See Tr. at 103, 104, 105, 109. The court finds that the facts do not permit a finding that Janzen shares a right to control Janzen, Inc. with the Stansburys. Additionally, the Stansburys apparently cannot share control over V P, Inc. because it is no longer operating. The joint enterprise theory, assuming it applies, therefore is not a basis to attribute Janzen, Inc.'s actions to Janzen or V P, Inc. The court next addresses EMSI's single enterprise claim to determine whether Janzen, Inc.'s actions are attributable to Janzen or V P, Inc.
The single enterprise doctrine "is an equitable doctrine which treats two interrelated corporations as one under partnership-type principles." North Am. Van Lines, Inc., 50 S.W.3d at 121. Accordingly, the doctrine provides that "when corporations are not operated as separate entities but rather integrate their resources to achieve a common business purpose, each constituent corporation may be held liable for debts incurred in pursuit of that business purpose." Paramount Petroleum Corp. v. Taylor Rental Center, 712 S.W.2d 534, 536 (Tex.App.-Houston [14 the Dist.] 1986, writ ref'd n.r.e.). Several non-exhaustive factors can be considered to determine whether corporations have been maintained as separate entities. The factors include whether the corporations have "common employees; common offices; centralized accounting; payment of wages by one corporation to another corporation's employees; common business name; services rendered by the employees of one corporation on behalf of another corporation; undocumented transfers of funds between corporations; and unclear allocation of profits and losses between corporations." Id. (citing Allright Texas, Inc. v. Simons, 501 S.W.2d 145, 150 (Tex.Civ.App.-Houston [1st Dist.] 1973, writ ref'd n.r.e.); Murphy Bros. Chevrolet Co. v. East Oakland Auto Auction, 437 S.W.2d 272, 275-76 (Tex.Civ.App.-El Paso 1969, writ ref'd n.r.e.)).
EMSI in part set forth the following allegations in support of its single enterprise claim: 1) Janzen, Inc. uses the same office space that V P, Inc. used; 2) Janzen, Inc. has the same registered agent for service of process as V P. Inc.; 3) Janzen, Inc. currently operates in a manner practically indistinguishable from the manner V P, Inc. was operated; 4) on at least one occasion a Janzen, Inc. part-time employee wore a badge that identified her as providing services on behalf of EMSI, although Janzen, Inc.'s contractual relationship is with Labone, and V P, Inc's contract was with EMSI; and 5) on at least one occasion a Janzen, Inc. employee answered the phone as EMSI, although Janzen, Inc.'s contractual relationship is with Labone, and V P, Inc.'s relationship was with EMSI. Brief in Support at 2-3; EMSI's Submission of Additional Briefing and Evidence, filed March 11, 2002, at 3.
These allegations create a suspicion that Janzen, Inc. may be a single enterprise with V P, Inc., but the court must base its decision on evidence, not suspicion. For instance, the court accepts Janzen's testimony that V P, Inc. no longer operates as a corporation, because EMSI has not brought forth satisfactory evidence to indicate otherwise. The single enterprise doctrine appears to require the existence of two ostensible corporations that integrate resources. Here, it appears that one corporation, Janzen, Inc., began to operate after another corporation, V P, Inc., ceased to operate. The doctrine does not appear to address these circumstances. Accordingly, since at this stage in the proceedings, EMSI has raised only suspicions that Janzen and V P, Inc. operate as a single enterprise, it necessarily fails to establish a substantial likelihood of success on the merits of its single enterprise claim. EMSI therefore has not demonstrated that Janzen, Inc.'s actions are attributable to Janzen or V P, Inc., and accordingly has not demonstrated that Janzen or V P, Inc. is violating the exclusivity provision in the 1979 contract. This prevents EMSI from demonstrating a substantial likelihood of success on the merits of its claim. EMSI's Amended Application therefore is denied with respect to its request to enjoin Janzen and V P, Inc. from breaching the 1979 contract's exclusivity provision. The court next addresses EMSI's conversion claim.
The court does not address the remaining considerations for issuance of a temporary restraining order on EMSI's claim for breach of the exclusivity provision, because it finds that EMSI has not met the first element.
B. Conversion
The record indicates that Janzen no longer is involved in paramedical services, and she no longer operates V P, Inc. As a result, there is no evidence that Janzen or V P, Inc. is involved in billing for paramedical services. Accordingly, there is no evidence that she or V P, Inc. is in a position to convert EMSI's billings. To the extent that EMSI contends that Janzen or V P. Inc. is responsible for converting billings in the past, the past conversions may be addressed as damages, but there is no apparent ongoing action, or threat of ongoing action to be enjoined.
Additionally, EMSI has not brought forth satisfactory evidence that Janzen, Inc.'s actions are attributable to Janzen or V P, Inc. This forecloses a finding that Janzen or V P. Inc. is currently involved in billing through Janzen, Inc. They therefore are not in a position to use Janzen, Inc. to covert EMSI's billings.
Finally, Janzen, Inc. apparently has an independent billing relationship with LabOne, and this billing is independent of EMSI. Accordingly, there is no evidence that Janzen, Inc. is converting EMSI's billings. To the extent that EMSI may be contending that Janzen, Inc. colluded with Janzen or V P, Inc. to convert EMSI's billings in the past, the past conversions may be addressed as damages, but there is no apparent ongoing action, or threat of ongoing action to be enjoined. EMSI's request to enjoin Janzen, V P, Inc., or Janzen, Inc. from converting billings therefore is moot. Consequently, EMSI has not shown a substantial likelihood of success on its claim that Janzen, V P, Inc. or Janzen Inc. is involved in ongoing conversion of its billings. IV. Expedited Discovery
The court does not address the remaining considerations for issuance of a temporary restraining order on EMSI's conversion claim, because it finds that EMSI has not met the first element.
EMSI's Motion to Expedite Discovery was conditioned on the need to undertake discovery to prepare for a preliminary injunction hearing. A preliminary injunction hearing would have been necessary only if EMSI's Amended Application had been granted. Since it is denied, the Motion to Expedite Discovery is moot, and is hereby denied.
V. Conclusion
For the reasons stated herein, Plaintiff Examination Management Services, Inc. has failed to establish a substantial likelihood of success on the merits. Consequently, its First Amended Complaint and Application for Temporary Restraining Order, Preliminary Injunction and Permanent Injunction, and Motion to Expedite Discovery are hereby denied.