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Subway Equip. Leasing Corp. v. Sims (In re Sims)

Subway Equip. Leasing Corp. v. Sims (In re Sims)

United States Court of Appeals for the Fifth Circuit

June 21, 1993, Decided

No. 92-3212, No. 92-3213

Opinion

 [*212]  BARKSDALE, Circuit Judge:

Principally at issue is whether, and when, a creditor corporation filing an involuntary bankruptcy petition under 11 U.S.C. § 303 may be held to be the alter ego of another, and thus not considered a requisite separate entity for filing purposes. The district court held, inter alia, that the three petitioning corporations -- Subway Equipment Leasing Corporation (SEL), Subway Restaurants, Inc. (SRI), and Subway Sandwich Shops, Inc. (SSS) -- are alter egos of another corporation, and therefore count as only one corporation. SEL, SRI, and SSS (the creditors) appeal from that court's reversal of the bankruptcy court's entry of orders for relief in their separate involuntary bankruptcy proceedings against Earl Sims, Jr. and his wife, Dorothy Sims (the debtors). We REVERSE the judgments of the district court, and REMAND for further proceedings in the bankruptcy [**2]  court.

The creditors are affiliated with the Subway sandwich shop organization. Doctor's Associates, Inc. (DAI), is the franchisor. SSS, incorporated in Connecticut in 1983, and SRI, incorporated in Delaware in 1986, acquire leases and sublease property to Subway franchisees. SSS operated in the Baton Rouge area; SRI, the New Orleans area. SEL, incorporated in Connecticut in 1985, leases restaurant equipment to Subway franchisees and other unrelated parties.

It is undisputed that the petitioning creditor corporations are in good standing in their States of incorporation. Minutes reflecting annual meetings held by each corporation were introduced into evidence. Each maintained a separate bank account during the time it dealt with the debtors. With the exception of additional vice presidents for SRI and SSS, all three of the creditor corporations have the same officers. Although SEL has employees, SRI and SSS operate through their officers. DAI does not own stock in them. For economic reasons, DAI's legal staff and contract leasing staff provided services to all of the corporations that dealt with Subway franchisees; similar services were provided to franchisees upon request.

Between [**3]  1981 and 1987, the debtors entered into four franchise agreements with DAI. Two were in Baton Rouge, on property subleased from SSS; two, in New Orleans, with subleases from SRI. SEL entered into equipment leases for the four franchises. In June 1988, the debtors defaulted on the sublease and equipment lease at one of the New Orleans shops; that September and October, at the other three. 2 

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994 F.2d 210 *; 1993 U.S. App. LEXIS 14798 **; Bankr. L. Rep. (CCH) P75,307; 29 Collier Bankr. Cas. 2d (MB) 443; 24 Bankr. Ct. Dec. 735

IN THE MATTER OF: EARL SIMS, JR., Debtor. SUBWAY EQUIPMENT LEASING CORPORATION, SUBWAY RESTAURANTS, INC., and SUBWAY SANDWICH SHOPS, INC., Appellants-Cross-Appellees, versus EARL SIMS, JR., Appellee-Cross-Appellant. IN THE MATTER OF: DOROTHY SIMS, Debtor. SUBWAY EQUIPMENT LEASING CORPORATION, SUBWAY RESTAURANTS, INC., and SUBWAY SANDWICH SHOPS, INC., Appellants-Cross-Appellees, versus DOROTHY SIMS, Appellee-Cross-Appellant.

Subsequent History:  [**1]  As Corrected.

Prior History: Appeals from the United States District Court for the Eastern District of Louisiana. D.C. DOCKET NUMBER CA 91 2150 A. JUDGE Charles Schwartz, Jr.

Disposition: REVERSED AND REMANDED.

CORE TERMS

bankruptcy court, district court, ego, bad faith, leases, bona fide dispute, subsidiary, petitions, petitioning creditor, involuntary, contingent, subleases, entities, defaults, cases, franchise, purposes, separate entity, cross-appeal, obligations, paying, clearly erroneous, involuntary bankruptcy, withholding, principles, contracts, judgments, parties, veil

Bankruptcy Law, Commencement of Case, Involuntary Cases, Grounds for Relief, Case Administration, General Overview, Prerequisites for Commencement, Standing, Conversion & Dismissal, Lack of Good Faith, Civil Procedure, Appeals, Reviewability of Lower Court Decisions, Adverse Determinations, Frivolous Appeals, Governments, Legislation, Interpretation, Business & Corporate Law, Shareholder Duties & Liabilities, Piercing the Corporate Veil, Procedural Matters, Judicial Review, Bankruptcy Appeals Procedures, Standards of Review, Clear Error Review, De Novo Standard of Review, Clearly Erroneous Review, De Novo Review, Evidence, Types of Evidence, Documentary Evidence, Trials, Bench Trials, Duties & Liabilities, Unlawful Acts of Agents, Fraud & Misrepresentation, Agency Relationships, Types, Management Duties & Liabilities, Causes of Action, Alter Ego, Sham Corporations, Shareholders, Torts, Vicarious Liability, Corporations, Subsidiary Corporations, Corporate Formalities, Corporate Finance, Initial Capitalization & Stock Subscriptions, Corporate Governance, Contracts Law, Affirmative Defenses, Fraud & Misrepresentation, Joinder of Parties, Compulsory Joinder, Necessary Parties, Parties, Bankruptcy, Debtor Benefits & Duties, Debtor Duties, Real Property Law, Secured Claims, Claims, Types of Claims, Definitions, Courts, Authority to Adjudicate, Proof of Claim, Eligibility