Business Associations - Paul A. Quiros and Gregory M. Beil
| Publication year | 1995 |
ARTICLES
Business Associationsby Paul A. Quiros* and Gregory M. Beif**
This Article analyzes noteworthy cases in the areas of corporate, partnership, securities and banking law decided during the survey period1 by the Georgia Court of Appeals, the Georgia Supreme Court, the United States district courts in Georgia and the United States Court of Appeals for the Eleventh Circuit. Additionally, the Article highlights certain enactments by the Georgia General Assembly revising the Official Code of Georgia Annotated ("O.C.G.A.").
I. Corporations
A. Piercing the Corporate Veil
The concept of piercing the corporate veil to hold shareholders personally liable for the debts of the corporation has been used by the Georgia courts in an attempt to remedy fraud or injustice. The courts, however, have failed to define precise standards to apply to rather predictable factual scenarios. Consequently, the results often seem contradictory and confused.2
Georgia courts generally frame the issue as whether the corporation is the alter ego or business conduit of its owner.3 The principal inquiry is not the composition of corporate ownership or control since, under Georgia law, a corporation and its shareholders or officers are distinct entities even if wholly-owned and controlled by an individual.4
To establish a claim to pierce a corporate veil the plaintiff must show: (1) that the shareholder's disregard of the corporate entity made it a mere instrumentality for the transaction of its own affairs; (2) that there is such unity of interest and ownership that the separate personality of the corporation and the owner or officer no longer exists; and (3) that to adhere to the doctrine of a separate corporate entity would promote injustice or protect fraud.5 For the issue to be submitted to a jury, Georgia courts require evidence that the corporate arrangement is a sham used to defeat justice, to perpetuate fraud, or to evade statutory, contractual or tort responsibility.6
Every year there are a number of reported cases in which a claimant seeks to pierce the corporate veil to reach the assets of a corporation's shareholders. The inquiry is a jury question and often these claims are tried in the course of litigation, although they may not be the main claim in a case. This activity will continue and be encouraged so long as the legislature and the courts do not develop a more workable set of legal standards to apply to veil-piercing claims.
(i) The Judiciary Seeks to Apply the Standard. In Mitcham v. Blalock,7 the court of appeals was asked to reverse a trial court which refused to pierce the corporate veil in a suit brought by an investor against the officers and directors of an investment company for losses allegedly caused by the corporation's broker's fraudulent acts and by the corporation's officers' and directors' negligent supervision, control and management.8 Once pierced, the plaintiff sought to recover against the corporation's officers and directors under section 14(c) of the Georgia Securities Act of 19739 and under common law doctrines of respondeat superior and breach of fiduciary duty.10
The court of appeals affirmed the trial court's summary judgment in favor of the defendants and the attendant decision to insulate the corporation's officers and directors from personal liability.11 Although the Court noted the plaintiff's claim under the Georgia Securities Act was time barred by the applicable two-year statute of limitation,12 it did analyze the veil-piercing claim and decided the plaintiff had failed to clear the essential hurdle to litigating the veil-piercing issue—that "some persuasive reason" for doing so must be presented.13
The plaintiff presented affidavits from two experts in the field of securities management supporting his claims that the defendants' management of the corporation was far below industry standards, but the court found the evidence insufficient to litigate the issue, stating that "plaintiff presented no evidence that defendants disregarded separation of the corporate entity by commingling assets or abuses of corporate form."14 Further, the court placed no weight on the fact that the plaintiff had previously secured a $60,000 arbitration award against the corporation and its broker.15 Instead, the court grounded its decision in the level of officer and director misconduct needed to pierce the corporate veil, explaining:
An officer of a corporation who takes part in the commission of a tort by the corporation is personally liable therefore, but an officer of a corporation who takes no part in the commission of a tort committed by the corporation is not personally liable unless he specifically directed the particular act to be done or participated or co-operated therein.16
The plaintiff failed to make the required showing of improper corporate purpose or tortious misconduct. In fact, the officers and directors had no personal contact with the plaintiff. Thus, the court readily declined to pierce the veil.17
A more difficult question of whether to pierce the corporate veil or, more particularly, whether to submit the question to a jury was presented in J & J Materials, Inc. v. Conyers Seafood Co.18 Here, the Georgia Court of Appeals affirmed the trial court's grant of a directed verdict in favor of a judgment debtor and its principal on a finding of no fraud, but reversed the trial court's directed verdict in favor of the debtor's principal involving an alter ego claim on evidentiary grounds.19
Appellant, J & J Materials ("J & J") had filed an action on account to recover payment from appellee, Conyers Seafood Company ("CSC"), for seafood CSC had procured from J & J in 1988.20 The trial court subsequently awarded J & J a default judgment exceeding $27,000.21 J & J could not collect on its judgment and brought an action below against CSC, CSC's sole shareholder, L.W. Evans, and Mrs. Evans for fraud and deceit.22 The complaint alleged the default judgment had not been satisfied, and that in his responses to post-judgment interrogatories, Mr. Evans made fraudulent misrepresentations on behalf of CSC as to the nature and extent of CSC's assets in order to deceive J & J into believing the default judgment was uncollectible.23
Another claim tried to hold Mr. Evans personally liable as CSC's principal for the default judgment debt by piercing CSC's corporate veil.24 The defendants denied the allegations of the complaint and argued that J & J failed to recover the default judgment because it did not exercise due diligence in enforcing the judgment.25
The facts before the court on which to evaluate the lower court's verdict were clear. Mr. Evans established a seafood wholesale business and restaurant in Georgia in 1973.26 The enterprise was initially a sole proprietorship and operated under the tradename "Conyers Seafood."27 In 1981, Evans incorporated his wholly-owned business and added "Inc." to the name "Conyers Seafood Company," but the business was always known simply as "Conyers Seafood."28 In June 1987, Evans sold the retail side of Conyers Seafood to Captain Don's Seafood, Inc., which concomitantly leased-back space to Evans.29 The sale did not involve any transfer of goodwill, tradename, telephone numbers, and the like.30 Evans still owned the wholesale side of Conyers Seafood, but planned to wind it down.31 After Captain Don's defaulted on the promissory note it gave Evans to finance the purchase, Evans brought an action in October 1987 on behalf of himself and CSC against Captain Don's and its principal seeking to repossess the premises.32
In January 1988, J & J filed suit against CSC to recover payment for the seafood it had shipped to CSC in April 1987.33 J & J received its default judgment in August 1988.34 In October 1988, Evans repossessed the premises from Captain Don's but failed to recover for amounts owed Evans on the note.35 In November 1988, Evans and his wife formed L & M Evans, Inc. d/b/a Conyers Seafood.36 Mrs. Evans owned all of the shares of the corporation.37 Conyers Seafood operated in its usual fashion, although corporate accounts were established to reflect the change in ownership.38 These facts were reflected in Mr. Evans' responses to J & J's post-judgment interrogatories.39
On appeal J & J argued that Mr. Evans' responses to the post-judgment interrogatories stated that CSC was no longer in business and that CSC was not owed money by any person or entity.40 The focus of J & J's argument was that it reasonably believed CSC was no longer in business after the $27,000 judgment was rendered.41 But the trial court found J & J's sole shareholder had knowledge that the business was operating under the tradename "Conyers Seafood" and that Mr. Evans' response was not deceptive since CSC was no longer in existence.42 The court of appeals therefore readily affirmed the lower court's finding of no fraud.43 The court refused, however, to affirm the trial court's directed verdict in favor of CSC and Evans with respect to the veil-piercing claim.44
The court commented that J & J's contention that it should be allowed to pierce the corporate veil of CSC and pursue satisfaction of its judgment against Mr. Evans in his personal capacity as CSC's sole shareholder was a "different matter" than the fraud claim against him.45 Couching its distinction in the "any evidence test"—the standard used to grant or deny a directed verdict—the court stated:
In Georgia, the standard used to review the grant or denial of a directed verdict is the any evidence test. Where there is no conflict in the evidence as to any material issue, and the evidence introduced, with all reasonable deductions therefrom, shall demand a particular verdict, such verdict shall be directed.46
The court then framed the issue in the traditional manner as whether the corporation served as the alter ego of its sole shareholder.47 After explaining the plaintiff's hurdle to submitting the question of whether to...
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