Business Associations - David A. Pope

• Publication year: 2002

Business Associationsby David A. Pope^*

This Article surveys recent developments in the corporate, partnership, and limited liability company law of Georgia. It covers noteworthy cases decided by the Georgia courts during the survey period of June 1, 2001 through May 31, 2002. This Article also surveys the recent revisions to the Official Code of Georgia Annotated ("O.C.G.A.") enacted by the Georgia General Assembly during the survey period.

I. Corporations

A. Piercing the Corporate Veil

Generally, a shareholder of a corporation has limited liability for the debts, obligations, and liabilities of the corporation. Georgia courts will, however, utilize the concept of piercing the corporate veil "to remedy injustices [that] arise where a party has overextended his privilege in the use of a corporate entity in order to defeat justice, perpetrate fraud or to evade contractual or tort responsibility."¹ A number of cases decided during the survey period involve the concept of piercing the corporate veil. The Georgia courts did not substantially change the law with regard to the concept; however, the following cases are illustrative of the courts' decisions during the survey period.

The case of Paul v. Destito² involved claims of fraud, negligent misrepresentations, conspiracy to breach fiduciary duty, negligent breach of fiduciary duty, and alter ego liability. Plaintiff alleged that fellow shareholders and directors of the subject corporation breached their fiduciary duty (1) by failing to inform him of an attempted corporate merger and (2) by failing to inform him that a separate corporation owned by defendants pledged the corporation's assets as collateral for a loan.³ The court of appeals cited the well-settled law that "'corporate officers and directors have a fiduciary relationship to the corporation and its shareholders and must act in good faith.'"⁴

Defendants in Paul asserted that the trial court erred in failing to grant their motions for directed verdict and judgment notwithstanding the verdict on plaintiff's alter ego liability claim because "'Georgia law does not allow a person who is a shareholder, director, and officer of a corporation to "pierce the [corporate] veil" of his own corporation.'"⁵ The court of appeals upheld the trial court, stating that "Georgia courts pierce the corporate veil 'to remedy injustices [that] arise where a party has overextended his privilege in the use of a corporate entity in order to defeat justice, perpetrate fraud or evade contractual or tort respon-sibility.'"⁶ The court explained, "The theory applies when 'there is such unity of interest and ownership that the separate personalities of the corporation and the owners no longer exist.'"⁷ The Georgia Court of Appeals rejected defendants' argument that Georgia law prohibits the piercing of the corporate veil by a director, officer, or shareholder.⁸ Accordingly, the court of appeals upheld the trial court's refusal to find plaintiff's alter ego liability allegations legally insufficient.⁹

In Ishak v. Lanier Contractors Supply, Inc.,¹⁰ the Georgia Court of Appeals held that the corporate veil may be pierced when one who owns or controls a corporation abuses the corporate form, disregards the corporate entity, or uses the corporation for personal transactions.¹¹ In Ishak, plaintiff, a supplier of building materials, brought suit against two construction companies, an individual who served as the president and sole shareholder of both companies, and an individual who served as vice president and the sole employee of one company for failure to pay for building materials. Plaintiff sought to charge both individual defendants with liability for the corporations' debts under a theory of piercing the corporate veil. After a nonjury trial, the court awarded plaintiff the relief sought against the individual defendants.¹²

The Georgia Court of Appeals found that evidence of a corporate officer conveying one of the corporation's primary assets to himself without payment of adequate consideration to the corporation and appropriating corporate funds to his own personal use supported a finding that the defendant had "abused the corporate form, disregarded the corporate entity, and made the corporation a mere instrumentality for transacting his own affairs."¹³ The court of appeals held that "[w]here those who own or control a corporation have brought about such a unity of interest and ownership as between themselves and the corporation, the unpaid corporate creditor may look to them for satisfaction of the corporation's debts."¹⁴

In Nat Katz & Associates, Ltd. v. Barber,¹⁵ a creditor sued the president of a construction company and a limited liability company, of which the individual defendant was the managing member, for payment of goods and services provided to the construction company. Plaintiff sought to hold the president of ICR, Inc. ("ICR"), Barber, personally liable for ICR's debt under an alter ego theory. After a bench trial, the trial court refused to pierce ICR's corporate veil and entered judgment for Barber.¹⁶

At trial, Barber admitted that ICR was indebted to plaintiff. Barber presented evidence that he, ICR, and a related limited liability company all maintained separate bank accounts. Evidence was also presented that ICR acted as the general contractor for Barber's home renovations and paid expenses of the project out of its corporate accounts.¹⁷ Barber testified that he reimbursed ICR for the renovation expenses, "which were recorded on ICR's books as officer advances" to Barber.¹⁸ The court of appeals affirmed the trial court's requirement that plaintiff show Barber "'disregarded the separate entities by commingling on an interchangeable or joint basis or confusing the otherwise separate properties, records or control.'"¹⁹ The court of appeals held that given the evidence presented, the trial court was authorized to reject plaintiff's alter ego allegations.²⁰

The Georgia Supreme Court decided perhaps the most significant case of the survey period involving the issue of piercing the corporate veil. In Miller v. Harco National Insurance Co.,²¹ the Eleventh Circuit Court of Appeals certified to the Georgia Supreme Court three questions regarding Georgia corporate law. In Miller plaintiffs brought suit in Michigan for personal injuries sustained in a motor vehicle collision. In the Michigan action, plaintiffs received a default judgment against Shippers Services Express. Plaintiffs subsequently filed suit in the Northern District of Georgia against the following defendants: Shippers Services Express, Inc. ("Corporation"); its sole shareholder, Galo Moya ("Moya"); Galo Moya d/b/a Shippers Services Express ("Sole Proprietorship"); and Harco National Insurance Company ("Harco"), an insurer that named the Sole Proprietorship as the only insured on a motor carrier policy.²²

The district court concluded that "the default judgment was enforceable against the Corporation under Michigan law. The district court also pierced the corporate veil based upon the alter ego theory and ruled that the Michigan judgment was enforceable against Moya and the Sole Proprietorship."²³ In addition, the district court granted summary judgment in favor of Harco, finding "there was no coverage because the policy insured only the Sole Proprietorship and the Corporation was the only entity against which the Michigan judgment was entered."²⁴

The United States Court of Appeals for the Eleventh Circuit upheld the district court's grant of summary judgment against the Corporation, the Sole Proprietorship, and Moya.²⁵ Regarding the grant of summary judgment in favor of Harco, plaintiffs argued that the primary issue " '[was] not whether Harco would be liable under its policy for the Michigan judgment, but whether Harco [was] liable for the judgment issued in the district court against all the Moya defendants, including its named insured.'"²⁶ The Eleventh Circuit Court of Appeals questioned the decision of the district court²⁷ and, therefore, certified to the Georgia Supreme Court the following questions:

"(1) Whether Georgia law recognizes a distinction between a suit against an individual doing business as a corporate entity and a suit against just the aforementioned legal entity? The question becomes whether insurance coverage given to final judgments against a named individual doing business as a corporate entity also provides such coverage when the final judgment is rendered solely against the corporate entity in suits under the motor common carrier provisions?

(2) When the insured party is found liable based on a theory of piercing the corporate veil, is the insurer then liable for the same, even if no independent coverage exists under the insurance policy?

(3) Does the mere fact that a court held the insured liable for an act covered by his policy create liability for the insurer?"²⁸ @@@

The Georgia Supreme Court noted that the Eleventh Circuit requested its assistance only on the insurer's "contention that there is no coverage because [p]laintiffs did not recover a judgment against the insured, as required by a federally mandated policy endorsement, and [p]laintiffs' assertion that the judgment against the Sole Proprietorship in the Georgia federal domestication action satisfies that policy requirement."²⁹

The Georgia Supreme Court characterized the Eleventh Circuit's initial inquiry as whether Georgia law recognizes a distinction between a suit against an individual shareholder and a suit against just the corporation.³⁰ The supreme court stated that "[a]n individual doing business under a trade name is clearly a sole proprietor distinct under Georgia law from a corporation in which that individual holds stock."³¹ With respect to coverage under the policy issued to the Sole Proprietorship, the court stated:

Although a policy provides coverage for final judgments recovered against the insured, it generally does not cover final judgments...