Castleberry v. Branscum
721 S.W.2d 270, 1986 Tex. LEXIS 563, 29 Tex. Sup. Ct. J. 481 (1986)
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Rule of Law:
When shareholders of a closely-held corporation use the corporate form as a fundamentally unfair device to achieve an inequitable result, such as by systematically siphoning its assets to other entities to avoid paying a corporate debt, courts may disregard the corporate fiction and hold the shareholders personally liable under a theory of 'sham to perpetrate a fraud,' which requires only proof of constructive fraud, not actual fraud.
Facts:
- Joe Castleberry, Byron Branscum, and Michael Byboth formed a partnership which they later incorporated as Texan Transfer, Inc., with each man owning one-third of the shares.
- Shortly after incorporation, Branscum formed a competing business named Elite Moving.
- When Castleberry discovered this and confronted him, Branscum threatened that he would ensure Castleberry 'would never get anything out of Texan Transfer.'
- In July 1981, Castleberry agreed to sell his stock back to Texan Transfer in exchange for a corporate promissory note for approximately $42,000.
- Texan Transfer made one initial payment of $1,000 and then defaulted on the remaining $41,000 balance owed to Castleberry.
- After Castleberry's departure, Branscum and Byboth used Texan Transfer's trucks and employees for Elite Moving without any formal rental agreement or mileage records.
- As Texan Transfer's income plummeted from over $65,000 to a net loss, Branscum's competing company, Elite Moving, prospered, declaring an income of over $195,000.
- Branscum and Byboth later formed another corporation, Custom Carriers, Inc., transferred Texan Transfer’s main business contract to it, sold Texan Transfer’s only assets (its trucks), and used the proceeds to pay themselves 'back salaries'.
Procedural Posture:
- Joe Castleberry sued Texan Transfer, Inc., Byron Branscum, and Michael Byboth in a Texas trial court to collect on a promissory note.
- A jury found that Branscum and Byboth had used Texan Transfer as a sham to perpetrate a fraud.
- The trial court entered a judgment holding Branscum and Byboth individually liable for the corporate debt.
- Branscum and Byboth, as appellants, appealed to the Texas court of appeals, with Castleberry as the appellee.
- The court of appeals reversed, rendering judgment for Branscum and Byboth on the grounds that there was no evidence to support the jury's verdict.
- Castleberry, as petitioner, sought and was granted review by the Supreme Court of Texas.
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Issue:
Does the use of a corporate entity by its controlling shareholders to drain its assets and transfer its business to competing companies they own, thereby rendering the corporation unable to pay a promissory note to a former shareholder, constitute a 'sham to perpetrate a fraud' sufficient to disregard the corporate fiction and hold the shareholders personally liable?
Opinions:
Majority - Spears, J.
Yes, using the corporate entity to drain its assets to avoid paying a debt is a sham to perpetrate a fraud sufficient to disregard the corporate fiction. Disregarding the corporate fiction is an equitable doctrine that allows courts to hold shareholders personally liable when they abuse the corporate privilege to achieve a fundamentally unfair result. The basis of 'sham to perpetrate a fraud' does not require proof of common-law or actual fraud, which involves an intent to deceive. Instead, it only requires proof of 'constructive fraud,' defined as the breach of a legal or equitable duty which the law declares fraudulent because it leads to an inequitable result, irrespective of moral guilt. Here, the evidence showed that Branscum and Byboth systematically siphoned Texan Transfer's business and assets into their other companies to ensure Castleberry would not be paid on the corporate promissory note. This manipulation created an inequitable result, meeting the standard for constructive fraud and justifying piercing the corporate veil. Furthermore, the question of whether to disregard the corporate fiction is a question of fact for the jury.
Dissenting - Gonzalez, J.
No, the shareholders' actions do not justify disregarding the corporate fiction under the theories submitted to the jury. The majority's standard for 'sham to perpetrate a fraud' is dangerously broad, effectively allowing courts to pierce the veil whenever a result seems 'inequitable,' which provides no meaningful guidance. The facts of this case demonstrate a potential usurpation of corporate opportunities or a fraudulent transfer of assets, not that the corporate entity of Texan Transfer was itself a sham or an alter ego. Castleberry's injury was caused by the shareholders' wrongful actions after he sold his stock, not by the existence of the corporate form itself, so he should have sued under a different legal theory. Additionally, the jury instruction was fatally erroneous, and the defendants' objection was sufficient to preserve this error for appeal, warranting a new trial.
Analysis:
This decision significantly clarifies the standard for piercing the corporate veil in Texas under the 'sham to perpetrate a fraud' doctrine. By holding that only constructive fraud—an inequitable result—is required, the court lowered the evidentiary burden for creditors, who no longer need to prove the shareholders had a specific intent to deceive. This makes it easier for claimants to hold shareholders of closely-held corporations personally liable when those shareholders manipulate corporate assets to avoid paying debts. The ruling reinforces the idea that piercing the corporate veil is a flexible, equitable remedy and affirms that its application is a question of fact for the jury, not a question of law for the judge.
