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Boughton v. Cotter Corp.

ELR Citation: 26 ELR 20196
Nos. No. 94-1155, 65 F.3d 823/(10th Cir., 09/06/1995)

The court holds that plaintiffs in a toxic tort case were not entitled at trial to be certified as a class for medical monitoring, to depose an attorney for the defendant uranium mill, or to present evidence of their fear of contracting disease, and that the trial court properly refused to pierce the corporate veil to hold the mill's parent liable. The court first reviews the trial court's refusal to certify plaintiffs as a class for abuse of discretion. The court holds that a case in which a court was found to have abused its discretion in refusing to certify a class is easily distinguishable because it was a securities fraud case, and the notes to Fed. R. Civ. P. 23 distinguish between mass fraud cases and mass accident cases. Further, a case in which a trial court certified a medical monitoring case is not to the contrary, because the issue on appeal here is not whether the trial court could have certified a class but whether it was an abuse of discretion not to. That the trial court partly based its refusal to certify the class on the fact that the relief sought was primarily money damages was not an abuse of discretion. Further some issues varied from individual to individual, and whether, on balance, individual issues predominated over common issues and whether the advantages of a class action outweighed the potential problems are determinations that are best left to the trial court. The court thus holds that the trial court's decision not to certify under Fed. R. Civ. P. 23(b)(3) was not an abuse of discretion.

The court next holds that the record supports the trial court's treatment of an attorney for the mill as an attorney entitled to protection from deposition under Shelton v. American Motors Corp., 805 F.2d 1323 (8th Cir. 1986). The court holds that the trial court had the discretion under Fed. R. Civ. P. 26(c) to issue a protective order against the deposition of the opposing counsel when any one or more of the three Shelton criteria for allowing deposition are not met. The court holds that plaintiffs failed to meet the first criterion (that no other means exists to obtain the information) because they failed to seek the desired information from other sources, and did not even fully explore those matters on which they wished to depose the attorney with the witnesses they did depose. The court next holds that plaintiffs failed to satisfy the third criterion (that the information is crucial to the preparation of the case). Even assuming that the attorney's testimony is essential to their claim for punitive damages, plaintiffs would first have to establish as many other elements of the attorney's alleged fraud as possible, including the nature of the statements made, through alternative sources. The court holds that plaintiffs' failure to make a substantial effort to do so before seeking to depose the attorney undermines their argument that the particular information sought would be proof of a crucial link or corroborative of a weak link in a chain of proven elements to prove damages. The court affirms the trial court's grant of the protective order.

The court next turns to the trial court's decision to exclude evidence of plaintiffs' unfounded fears of cancer or other disease as "annoyance and discomfort" damages under nuisance and trespass theories of recovery. The court notes that Colorado allows damages for annoyance and discomfort in cases of injury to real property. The court rejects plaintiffs' argument that even though their emotional distress claims were dismissed, they should be allowed to introduce evidence of fear of cancer and other disease because there is a distinction between proof of liability on an emotional distress claim through evidence of fear of disease and proof of damages in a nuisance case through fear of disease. The cited comment from the Restatement 2d of Torts is not on point because it deals with proof of liability in a nuisance case, not damages. Further, it is not clear that Colorado would follow the comment even if it were on point. The court holds that it is not clear that fear of disease must be compensable as an item of "annoyance and discomfort" even if fear of disease can prove an element of a nuisance claim. The court holds that Colorado cases suggest that the Colorado Supreme Court would reject the contention that unfounded fears of the future can constitute annoyance and discomfort damages. The potential for fraudulent or speculative claims that concerns the Colorado Supreme Court could only be effectively limited in a nuisance or trespass case such as this by a rule requiring evidence substantiating that the fears of disease resulting from the contamination of land are reasonable and have a sound foundation in medical, scientific, or statistical evidence. The trial court found that plaintiffs' fears were not grounded by substantial evidence and that such a foundation was a prerequisite to the admissibility of the evidence. The court holds that the trial court's interpretation of the law was not in error on this point and that the decision to exclude the evidence was not an abuse of discretion.

Turning to the liability of the mill's parent corporation, the court next holds that in order to hold the parent liable, plaintiffs must prove that the mill was used to defeat public convenience or to justify or protect wrong, fraud, or crime. The court holds that the possibility that plaintiffs may have difficulty enforcing a judgment is not the type of injustice that warrants piercing the corporate veil. The court next holds that whether a subsidiary is a mere instrumentality is determined by reference to 10 specific criteria. Regarding the fifth criteria (whether the subsidiary is adequately capitalized) the court holds that the mill's repayment of indebtedness to the parent by granting it preferred stock does not indicate that the mill is undercapitalized. The purchase of preferred stock, whether for cash or in exchange for the discharge of indebtedness, adds value to the mill and leaves it better able to meet its obligations to all its creditors. Further, regardless of how its inventories should be treated on the balance sheet, the mere fact that a business becomes "undercapitalized" solely because of the recharacterization of assets when it ceases to operate does not prove that the business was set up to be undercapitalized, nor does it show that the corporation was used to defeat public convenience or to justify or protect wrong, fraud, or crime. The court next holds that a case in which a court pierced the corporate veil because the first, second, and seventh factors were present, as they are in this case, is distinguishable because in that case the subsidiary was not only owned by the parent, but was originally incorporated as a wholly owned subsidiary. Here, the mill was an independent corporation for years before the parent purchased it. The court holds that the third factor (parent financing) and the ninth factor (taking direction from the parent) are somewhat qualifiedly present here. Further, the sixth factor (that the parent pays salaries, expenses, or losses of the subsidiary) is partly present in the sense that the parent was required to reimburse the mill for expenses incurred for its benefit; however, there is nothing to suggest that the formal separateness of the corporations was disregarded. And the first (parent ownership), second (interlocking boards), seventh (substantially no business except with the parent), and eighth (reference to the subsidiary as such in the parent's papers) factors are all present. But the court holds that the fourth (that the parent organized or subscribes to all of the subsidiary's stock), fifth (grossly inadequate capital), and tenth (failure to observe corporate formalities) factors are not satisfied. The court holds that even if a majority of the factors favor the party seeking to pierce the corporate veil, that party does not necessarily prevail if the factors, when taken as a whole with due regard to the extent to which they were satisfied, do not demonstrate that the corporate form was used to defeat public convenience or to justify or protect wrong, fraud, or crime. The court holds that piercing the corporate veil was not warranted.

Counsel for Plaintiffs
Louise M. Roselle
Waite, Schneider, Bayless & Chesley
1513 Central Trust Tower
Fourth & Vine Sts., Cincinnati OH 45202
(513) 621-0267

Counsel for Defendant
John L. Watson
Holme, Roberts & Owen
1700 Lincoln St., Ste. 4100, Denver CO 80203
(303) 861-7000

Before Seymour, J.