Business Associations - Paul A. Quiros, Lynn S. Scott, William B. Shearer Iii, and James F. Brumsey

• Jurisdiction: Georgia,United States,Federal
• Publication year: 2004
• Citation: Vol. 56 No. 1

Business Associationsby Paul A. Quiros^* Lynn S. Scott^** William B. Shearer III^*** and James F. Brumsey^****

This Article surveys noteworthy cases in the areas of corporate, securities, partnership, and banking law decided during the survey period¹ by the Georgia Supreme Court, the Georgia Court of Appeals, the United States Court of Appeals for the Eleventh Circuit, and the United States district courts located in Georgia. The Article also summarizes recent enactments of the Georgia General Assembly with respect to the foregoing subject matters.

I. Corporations

A. Piercing the Corporate Veil

1. Facts Insufficient to Warrant Piercing of Corporate Veil. In

Boswell v. Primary Care Professionals, P.C.,² the court of appeals considered whether the trial court's grant of summary judgment to the president of a company was proper under Georgia's veil-piercing doctrine.³ The assets of the Tate Community Clinic (the "Tate Clinic") were purchased in 1993 by Primary Care Professionals, P.C. ("Primary Care"), a professional corporation organized by Dr. David Fields ("Fields") for the sole purpose of purchasing the Tate Clinic. Fields subsequently became the president of Primary Care in 1996. The total purchase price for the Tate Clinic was $300,000, with $250,000 to be paid in a note over eight years, and the sellers took a security interest in all property transferred to Primary Care.⁴

In 1997 plaintiffs were informed of Primary Care's financial difficulties, and defendant's payments under the note and the lease were not paid on time. Three months prior to the expiration of the lease, plaintiffs negotiated with a third party, Mountainside Medical Center ("Mountainside"), to take over the lease. Plaintiffs, who had been employed by Primary Care at the Tate Clinic, began working for Mountainside. Primary Care subsequently ceased its operations and its payments under the note, and Fields formed a new corporation, Parkway Medical Center, P.C. ("Parkway"), moved into a new building, and hired a new administrator to handle the financial and corporate matters.⁵ on appeal from summary judgment in favor of Fields individually, plaintiffs argued that the trial court erred in granting summary judgment because Primary Care was the "alter ego and instrumentality" of Fields, and was used as a means to defraud plaintiffs and evade payment obligations under the note.⁶ Specifically, plaintiffs offered the following "facts" in support of their position: (1) Primary Care ceased operations because of its financial condition and inability to pay plaintiffs; (2) Fields lacked knowledge with respect to the financial and administrative operations; and (3) Primary Care and Parkway "commin- gled" assets because Parkway used certain assets previously belonging to Primary Care.⁷

The court rejected each of plaintiffs' contentions and, in so doing, was persuaded by the following facts: (1) Fields was not a party to the contract between plaintiffs and Primary Care, but was merely involved as an officer thereof; (2) plaintiffs produced no evidence that the debt was Fields's individually, rather than Primary Care's; (3) plaintiffs produced no evidence that Primary Care ceased operations for the purpose of avoiding its debt, rather than as a result of a lack of funds; (4) no evidence showed that it was Fields's idea to discontinue operations of Primary Care instead of the administrator; (5) plaintiffs did not depose Primary Care's office administrator to determine Fields's involvement, or lack thereof, in the operation of the Company; (6) Fields could not have commingled the affairs of Primary Care and Parkway because the two entities were not in existence at the same time; (7) Fields did not remove the patient files from the Tate Clinic as plaintiffs contended; and (8) the fact that Parkway used certain equipment and employees formerly belonging to Primary Care did not demonstrate how such use benefited Fields personally.⁸ Because plaintiffs put on no evidence that Fields disregarded the separation of the corporate entity from its owners by commingling assets or abusing the corporate form, it affirmed the trial court's grant of summary judgment.⁹

2. Veil-Piercing Laws of State Where Contract Entered Into Applicable Rather than Laws of State of Incorporation of

Shareholder. In Multi-Media Holdings, Inc. v. Piedmont Center 15 LLC,¹⁰ the Georgia Court of Appeals upheld a jury verdict piercing the corporate veil to hold a parent company liable for the debts of its subsidiary.¹¹ In so doing, the court determined that the trial court properly applied Georgia's veil-piercing doctrine rather than Delaware law, as the parent company had advocated.¹² In Multi-Media Holdings, Pollack Levitt & Partners ("PL&P") leased space at Piedmont Center under a lease agreement that required the consent of Piedmont Center to any assignment of the lease. As a condition to a merger between PL&P and a subsidiary ("Merger Sub") of Multi-Media Holdings ("MultiMedia"), PL&P requested permission from Piedmont Center to assign the lease to Multi-Media, and not the Merger Sub, which Piedmont Center granted. Subsequently, PL&P merged with the Merger Sub. The Merger Sub paid rent for three months before going out of business. Piedmont Center sued Multi-Media for payment of rents due under the lease contending the following: (1) James Pollack of PL&P had authority to bind Multi-Media to the terms of the lease; (2) Multi-Media ratified Pollack's request to assign the lease; and (3) Multi-Media's dealings with the Merger Sub warranted piercing the corporate veil.¹³

After determining that sufficient evidence was presented for the jury's verdict on the agency and ratification theories, the court determined that the jury was properly charged on Georgia's veil-piercing doctrine rather than that of Delaware.¹⁴ Relying on the choice of law principles set forth in the Restatement (Second) of Conflict of Laws,¹⁵ which directs that the court should apply the law of the state of incorporation to veil-piercing claims, defendant argued that Delaware law should apply.¹⁶ However, the court noted that the Georgia Supreme Court had recently reiterated that "'the Restatement (Second) Conflict of Laws has never been adopted in Georgia' and 'Georgia will continue to adhere to the traditional conflicts of law rules.'"¹⁷ Therefore, the court applied Georgia's veil-piercing laws to the case at hand, stating:

Under Georgia law, courts may pierce the corporate veil "to remedy injustices which 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 responsibility[, and] [t]he theory applies when there is such unity of interest and ownership that the separate personalities of the corporation and the owners no longer exist."¹⁸

Thus, the court determined there was no error in the trial court's jury charge with respect to the veil-piercing claim.¹⁹

3. Limited Liability Company Shield Protected. As explained by the Georgia Court of Appeals,

Just as the corporate veil protects an individual shareholder of a corporation from personal liability for the debts of the separate corporate entity (so long as the corporate forms are maintained) so is a member of a limited liability company (LLC) "veiled" from personal liability for the debts of the separately maintained LLC entity.²⁰

Similar to the court's ability to disregard the corporate veil with respect to corporations, a court may disregard the corporate veil with respect to an LLC when an individual member of an LLC, "in order to defeat justice or perpetrate fraud, conducts his personal and LLC business as if they were one by commingling the two on an interchangeable or joint basis or confusing otherwise separate properties, records, or control."²¹

In Bonner v. Brunson,²² a construction subcontractor and its principal sued both the limited liability company ("LLC"), which acted as the general contractor, and the sole owner of the LLC to collect over $288,000 for roofing work performed pursuant to a subcontract with the LLC.²³ The court of appeals affirmed the lower court judgment that there was no abuse of the limited liability structure; and therefore, the owner of the LLC was entitled to the protection of the corporate shield.²⁴

Bonner first contended that the LLC's veil should be pierced based on the commingling of funds among Brunson individually and certain Brunson-owned entities, including the LLC. Specifically, Bonner contended that construction loan draw requests, submitted on behalf of the LLC, indicated roofing work was done by Bonner, but none of the funds were paid to Bonner, and excessive funds were paid to a Brunson- owned heating and air subcontractor.²⁵ However, the court concluded there was no evidence that Brunson's heating and air corporation was overpaid for the total amount of work performed on the project.²⁶ Futhermore, the court determined that overpayment to Brunson's corporation would not be evidence that Brunson, individually, confused his personal affairs with those of the LLC.²⁷

Next, Bonner argued that Brunson commingled LLC funds with his personal funds when he accepted a check in the amount of $360,000 from the LLC, and his wife, Luree Bonner, accepted a check in the amount of$150,000 from the LLC. However, Brunson explained that he and his wife removed these funds from the non-interest bearing operating account solely for the purpose of placing them in an interest-bearing account, and that all amounts were subsequently repaid to the operating account. As such, these facts were not sufficient to demonstrate commingling of funds.²⁸

The court next rejected Bonner's argument that Brunson commingled funds when Brunson's wife, also the LLC's bookkeeper, wrote various LLC checks to cash in the total amount of $3700; however, the record indicated that at least a portion of the cash was used to pay for casual labor and security...