Principal Metals

129 Wash.App. 1003 (2005) | Cited 0 times | Court of Appeals of Washington | August 18, 2005

JUDGES Concurring: Dennis J. Sweeney Frank L. Kurtz


Principal Metals, Inc. obtained a default judgment against Washington corporations MCE U.S.A., Inc. (MCE) and MCE Technologies, Inc. (MCET) in a Massachusetts county district court. When Principal filed the judgment in Washington, MCE unsuccessfully moved to vacate. MCE appeals, contending Massachusetts had neither personal nor subject matter jurisdiction to render judgment. We conclude that the Massachusetts court did not have personal jurisdiction over MCE, and reverse and remand for vacation of the default judgment.


MCET was a wholly owned subsidiary of MCE, a holding company. From December 2001 to April 2002, MCET bought metal products from Principal, a Delaware corporation with its principal place of business in Massachusetts. In July 2002, MCET wrote a letter notifying Principal that MCET was 'experiencing severe cash flow problems.' Clerk's Papers (CP) at 41. Because of this situation, MCET continued, it had only two options: either shut down its operations or sell a majority interest in MCET to existing management. The management purportedly had agreed to the purchase as long as MCE retained $2.5 million of the debt on MCET's balance sheet. MCET proposed to pay Principal 12 equal monthly payments on its outstanding debt of nearly $22,700, beginning in January 2003.

On January 13, 2003, MCET again wrote Principal and declared that it was ceasing operations. The letter continued: 'Unfortunately, MCET will be unable to complete payment on any invoices you may have submitted. For the first time since our inception, MCET has no choice but to default on this debt, and we sincerely apologize for any hardship this event will cause.' CP at 44.

Principal filed a complaint against MCET, MCE, Daniel Vallerie (president of MCET), and two other defendants in the Cambridge district court, Massachusetts, in February 2003. One count of the complaint asked the court to pierce the corporate veil of MCET to hold MCE responsible for MCET's debt. A statement of damages filed contemporaneously averred that damages were not likely to exceed $25,000.

In March 2003, Thomas Heye, counsel for MCE, MCET, and Mr. Vallerie, wrote to Principal's attorney and declared that Massachusetts had no long- arm jurisdiction over his clients. He warned Principal that if it continued to pursue the matter, his clients could recover all costs and attorney fees for appearing and successfully moving to dismiss. Principal agreed to dismiss Mr. Vallerie from the lawsuit. Mr. Heye then wrote Principal's attorney and suggested settling by taking judgment against MCET and dismissing MCE. Apparently Principal did not agree to settle. MCE and MCET never answered the complaint or appeared, and MCET was dissolved in November 2003.

On December 16, 2003, the Massachusetts district court entered an order for default judgment against MCE and MCET. The judgment entered in January 2004 awarded Principal $98,545 in damages and $10,465 in prejudgment interest for a total of over $109,000. Principal filed the judgment in the Benton County Superior Court in March 2004 and MCE moved for an order to show cause regarding vacation of the foreign judgment. At the hearing held in May 2004, MCE argued that it was merely a holding company, with no employees and doing no business in either Washington or Massachusetts. The trial judge stated he did not feel comfortable vacating the foreign judgment and offered to grant a 90-day injunction for MCE to challenge jurisdiction in the Massachusetts court. MCE responded that if the court refused to vacate, it intended to appeal rather than to appear in Massachusetts. The trial court entered an order denying the motion to vacate in June 2004 and MCE timely appealed.

Vacation of a Foreign Default Judgment

MCE contends the trial court erred in denying its motion to vacate the Massachusetts judgment. It argues that the Massachusetts district court did not have personal jurisdiction over MCE or jurisdiction over the subject matter of the suit. Principal contends that, because our review is of a trial court's decision whether to vacate a default judgment, the standard of review is abuse of discretion, citing Haley v. Highland, 142 Wn.2d 135, 156, 12 P.3d 119 (2000) (review of a CR 60(b) motion to vacate). However, review of a trial court's determination whether to accord full faith and credit to a foreign judgment is de novo.1 Tonga Air Servs., Ltd. v. Fowler, 118 Wn.2d 718, 725, 826 P.2d 204 (1992). We also review de novo a trial court's decision to grant or deny a CR 60(b) motion to vacate a default judgment for lack of jurisdiction. Dobbins v. Mendoza, 88 Wn. App. 862, 871, 947 P.2d 1229 (1997).

A judgment rendered by a court of another state is entitled to recognition in Washington by virtue of the federal full faith and credit clause, United States Constitution, article 4, section 1. Effert v. Kalup, 45 Wn. App. 12, 14, 723 P.2d 541 (1986). Collateral attack of another state's judgment is limited to issues of the other state's personal and subject matter jurisdiction and to claims that the judgment was obtained fraudulently. Id. at 15. Additionally, Washington's Uniform Foreign Money- Judgments Recognition Act, chapter 6.40 RCW, provides that a final and conclusive foreign judgment granting recovery of a sum of money is enforceable to the same extent as a judgment that is entitled to full faith and credit. RCW 6.40.020, .030. A foreign money-judgment is not conclusive, and therefore will not be recognized in Washington, if the foreign court did not have personal jurisdiction over the defendant or jurisdiction over the subject matter. RCW 6.40.040(1)(b), (c). We first address, therefore, whether Massachusetts had jurisdiction over MCE. See Indus. Fin. Co. v. Lovell, 9 Wn. App. 829, 831, 515 P.2d 1304 (1973).

The Massachusetts long-arm statute, Mass. Gen. Laws chapter 223A, section 3, provides that '{a} court may exercise personal jurisdiction over a person, who acts directly or by an agent, as to a cause of action in law or equity arising from the person's . . . transacting any business in this commonwealth.' A nonresident defendant is subject to personal jurisdiction in Massachusetts if (1) the defendant or an agent transacts business in the state, and (2) the plaintiff's claim arises from that transaction. Good Hope Indus., Inc. v. Ryder Scott Co., 378 Mass. 1, 6, 389 N.E.2d 76 (1979). The phrase 'transacting any business' includes any purposeful acts, whether personal, private, or commercial. Ross v. Ross, 371 Mass. 439, 441, 358 N.E.2d 437 (1976). Although an isolated transaction may be insufficient to establish jurisdiction, deliberate contacts that make invocation of the benefits and protections of the forum's laws reasonably foreseeable are sufficient. Good Hope, 378 Mass. at 9-11.

Personal jurisdiction under the Massachusetts long-arm statute is valid only to the extent allowed by constitutional due process. Daynard v. Ness, Motley, Loadholt, Richardson & Poole, 290 F.3d 42, 52 (1st Cir. 2002) (quoting 'Automatic' Sprinkler Corp. of Am. v. Seneca Foods Corp., 361 Mass. 441, 280 N.E.2d 423 (1972)). The due process clause of the Fourteenth Amendment protects a nonresident from binding judgments in a forum with which he or she has not established certain minimum contacts. Int'l Shoe Co. v. Washington, 326 U.S. 310, 319, 66 S.Ct. 154, 90 L.Ed. 95 (1945); Daynard, 290 F.3d at 52. 'In a contract case, we evaluate the parties' 'prior negotiations and contemplated future consequences, along with the terms of the contract and the parties' actual course of dealing' to determine whether the defendants purposefully established minimum contacts.' Daynard, 290 F.3d at 52 (quoting Burger King Corp. v. Rudzewicz, 471 U.S. 462, 479, 105 S.Ct. 2174, 85 L.Ed. 2d 528 (1985)).

A trial court's determination of personal jurisdiction may rest on the facts alleged in the complaint. Kleinerman v. Morse, 26 Mass. App. Ct. 819, 821 n.4, 533 N.E.2d 221 (1989). Principal's complaint alleged that MCET bought metal products from Principal on numerous occasions from December 1, 2001 through April 3, 2002. The complaint also stated that MCET had sent two letters to Principal discussing MCET's financial troubles, proposing a payment schedule, and eventually defaulting on the debt. MCET's deliberate and sustained transactions with Principal were sufficient to establish personal jurisdiction under the Massachusetts long- arm statute and the due process clause. However, the complaint does not allege that MCE directly negotiated with, purchased from, paid, or corresponded with Principal in Massachusetts. Consequently, Principal has not established a basis for personal jurisdiction over MCE in Massachusetts unless it can pierce the corporate veil and establish that MCE is liable for its subsidiary's acts.

Generally, the fact that a subsidiary company does business within a state does not confer jurisdiction over its nonresident parent, even if, as here, the parent is the sole owner of the subsidiary. Escude Cruz v. Ortho Pharm. Corp., 619 F.2d 902, 905 (1st Cir. 1980). The nonresident parent corporation must exercise significant control over a subsidiary to overcome the presumption of corporate separateness. Id.; Kleinerman, 26 Mass. App. Ct. at 823. Massachusetts only rarely disregards the corporate form and generally concludes 'there is nothing fraudulent or against public policy in limiting one's liability by the appropriate use of corporate insulation.' Miller v. Honda Motor Co., 779 F.2d 769, 773 (1st Cir. 1985) (applying Massachusetts law).

The seminal Massachusetts case, My Bread Baking Co. v. Cumberland Farms, Inc., 353 Mass. 614, 619, 233 N.E.2d 748 (1968), holds that separate corporate entities may be disregarded if (a) one corporation actively and pervasively controls the activities of another and 'there is some fraudulent or injurious consequence of the intercorporate relationship'; or (b) there is 'a confused intermingling' of the corporations engaged in a common enterprise, with 'substantial disregard of the separate nature of the corporate entities,' or 'serious ambiguity' about who the representatives of the corporations represent. Additional criteria were added in subsequent cases, including such factors as thin capitalization and nonobservance of corporate formalities. Evans v. Multicon Constr. Corp., 30 Mass. App. Ct. 728, 733, 574 N.E.2d 395 (1991).

Here, the record shows neither pervasive control of MCET by MCE nor confused intermingling of the corporations. Principal's complaint alleges that MCET is closely held by MCE, which is MCET's majority shareholder. The correspondence from MCET to Principal indicated that MCE could either shut down the MCET operations due to cash flow problems, or sell its majority interest to existing management. According to this first letter, the management had agreed to buy MCE's majority interest if MCE would retain $2.5 million of MCET's debt. MCET's final correspondence with Principal merely reported that MCET was ceasing operations and did not mention what happened with MCE's majority interest or with the proposed buy- out, which apparently did not occur.

Principal alleged several 'acts' that justified piercing MCET's corporate veil to hold MCE responsible for a judgment against MCET, but these 'acts' are actually legal conclusions rather than facts supporting disregard of the corporate entities:2

a. MCE USA has active and pervasive control of MCET;

b. upon information and belief, there is confused intermingling of business activity and assets of MCE USA and MCET;

c. MCET is thinly capitalized;

d. upon information and belief, MCET does not observe corporate formalities{;}

e. upon information and belief, MCE USA has assumed some of the debt of MCET, including the Outstanding Balance.

CP at 30-31. None of these statements is supported by facts in the record. Nothing in the correspondence attached to the complaint indicates that MCE exercised pervasive control over MCET, intermingled assets, or actually assumed MCET's debt. MCE never directly corresponded nor transacted with Principal. And Principal cites nothing to show that it was confused about the differing roles of MCET and its holding company, MCE. The correspondence from MCET clearly describes MCE as '{o}ur parent company.' CP at 41. Finally, although Principal alleges that MCET was thinly capitalized, MCET's first letter boasted sales the previous year in excess of $58 million and a current 'healthy backlog' of $5 million. CP at 41.

Ultimately, the record does not show that the corporate identities of MCET and MCE were so confused that Principal could not be certain with whom it was dealing. See Evans, 30 Mass. App. Ct. at 736. Personal jurisdiction over MCE could not be justified by piercing the corporate veil and holding MCE liable for the debts of its subsidiary, MCET. The trial court erred in denying MCE's motion to vacate the foreign judgment due to lack of personal jurisdiction.

MCE's argument that the Massachusetts district court did not have subject matter jurisdiction over this controversy is not, however, persuasive. MCE contends the district court has a jurisdictional limit of $25,000, citing Mass. Gen. Laws chapter 31 sections 97-107. As Principal notes, there is no chapter 31 in the Massachusetts statutes. Assuming MCE meant to cite chapter 231, that chapter merely provides that if a claim in district court exceeds $25,000, a party may file to remove the action to superior court. Mass. Gen. Laws ch. 231, sec. 104; see Noonan v. Thermo Consulting Eng'rs, Inc., 40 Mass. App. Ct. 904, 904, 660 N.E.2d 699 (1996). Under Massachusetts law, the district court apparently had jurisdiction over the subject matter of this suit, even after Principal amended its request for damages to exceed $25,000.

Reversed and remanded for vacation of judgment.

A majority of the panel has determined that this opinion will not be printed in the Washington Appellate Reports but it will be filed for public record pursuant to RCW 2.06.040.

Schultheis, J.


Sweeney, A.C.J.

Kurtz, J.

1. The term 'foreign' refers to judgments of other states as well as to judgments of other countries. Rains v. Dep't of Soc. & Health Servs., 98 Wn. App. 127, 132-33, 989 P.2d 558 (2000).

2. The majority of Massachusetts cases require the plaintiff to support allegations of personal jurisdiction with nonconclusory facts in the record. Fern v. Immergut, 55 Mass. App. Ct. 577, 580 n.7, 773 N.E.2d 972 (2002).

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