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

• Publication year: 2000

SURVEY ARTICLES

Business Associationsby Paul A. Quiros^*

Lynn S. Scott^** and

William B. Shearer III^***

This Article surveys recent developments in Georgia's corporate, securities, partnership and banking law. It covers noteworthy cases decided during the survey period¹ by the Georgia appellate courts, United States district courts located in Georgia, and the Eleventh CircuitCourt of Appeals. Also included in this Article are highlights of recent revisions to the Official Code of Georgia Annotated ("O.C.G.A.").

I. Corporations

A. Piercing the Corporate Veil

A corporation is a legal entity separate from its shareholders, officers and agents. The corporation's owners and managers act as mere agents of the corporation and are not personally liable for the corporation's debts. However, this so-called corporate shield is not impenetrable; it may be pierced. In determining whether to pierce the corporate veil, the most fundamental analysis focuses on whether the corporate structure has been so abused that injustice can only be avoided by holding the agents of the corporation liable for its debts.² More often than not, Georgia courts did not pierce the corporate veil when presented with the issue during this survey period. However, the courts pierced the corporate veil under circumstances in which the corporation's officers or directors paid for their own personal apartments with corporate funds, commingled funds, and personally collected insurance proceeds for damages specifically caused by the officer making the claim.³

Notwithstanding the continued proliferation of veil-piercing claims, the Georgia courts have failed to provide concrete guidance for evaluating disparate factual situations. The courts have continued to use a variety of theories to justify piercing the corporate veil, including alter ego, apparent or ostensible agency, fraud, abuse, and joint venturer.⁴ As a result, appellate review has been inconsistent, and potential appellants are more apt to try their fortune at the appellate level.⁵

Courts generally frame the issue of piercing the corporate veil as whether the corporation is the alter ego or business conduit of its shareholders.⁶ The main inquiry does not focus on the composition of corporate ownership or control because, under Georgia law, a corporation and its shareholders or officers are separate entities even if wholly owned and controlled by a sole shareholder.⁷ To pierce the corporate veil in Georgia, a plaintiff must show the following: (1) that the shareholder's disregard of the corporate entity made the corporation a mere instrumentality for the transaction of the shareholder's own affairs; (2) that there is such unity of interest and ownership that the separate personalities of the corporate form and the shareholder or officer cease to exist; and (3) that to adhere to the doctrine of a separate corporate entity would promote injustice or perpetrate fraud.⁸ More specifically, before a veil-piercing claim is submitted to a jury, courts will require substantive evidence demonstrating that the corporate arrangement represented simply a sham used "to defeat justice, to perpetuate fraud, or to evade statutory, contractual or tort responsibility."⁹

1. Court of Appeals of Georgia Affirms Grant of Summary Judgment and Provides Review of Georgia Law. The controversy in Clark v. Cauthen¹⁰ began in 1987 as a result of an automobile accident. Carolyn Clark (formerly Carolyn Tibbs) brought suit against Studebaker's of Savannah, Inc. ("Studebaker's"), seeking damages she incurred in a head-on collision with Janice Carter, a patron of Studebaker's. Because the accident occurred within fifteen minutes after Carter departed Studebaker's and because Carter was allegedly intoxicated at the time of the collision, Clark sought to hold Studebaker's liable for Carter's negligence.¹¹ A jury returned a verdict in favor of Clark in the amount of $250,000 and against Carter and Studebaker's jointly and severally.¹² The court of appeals affirmed the verdict and certiorari was denied.¹³ Unable to collect on her judgment, Clark initiated suit against Victor Cauthen, a former shareholder and owner of Studebaker's, in an effort to pierce the corporate veil and collect against him personally. The trial court granted summary judgment in favor of Cauthen, and Clark appealed.¹⁴

The Court of Appeals of Georgia reiterated principles of corporate law rooted in the nineteenth century: "[E]ach corporation is a separate entity, distinct and apart from its stockholders, and insulation from liability is an inherent purpose of incorporation."¹⁵ Adhering to these principles, Georgia courts are reluctant to disregard the corporate structure and hold individual stockholders liable for any corporate debt. In determining whether to pierce the corporate veil, Georgia courts have long upheld the following: "Sole ownership of a corporation by one person or another corporation is not a factor, and neither is the fact that the sole owner uses and controls it to promote his ends. There must be evidence of abuse of the corporate form."¹⁶ This abuse is not determined by any rigid formula although certain abuses may be more condemning than others.

The record showed that "Cauthen sold his interest in Studebaker's to a corporation that had been administratively dissolved, received a $20,000 loan from Studebaker's that was later characterized as salary, and forgave royalty payments that were to be paid [to] him."¹⁷ However, the acts were justified, and none of these facts resulted in, or resulted from, a disregard for the legal entity. The court found that Cauthen was not aware of the administrative dissolution, that the $20,000 loan "was consistent with Studebaker's usual practice regarding the owner's compensation," and that forgiveness of the royalty payments "did not affect Studebaker's financial condition."¹⁸

While Clark amassed a record ripe with "questionable behavior, inaccurate information and inconsistent testimony," she produced no evidence "of triable jury issues which would result in the corporate veil being pierced."¹⁹ In veil-piercing claims, summary judgment is only appropriate "if no evidence exists that shows, or from which it might be inferred, that 'the corporate arrangement was a sham, used to defeat justice, to perpetuate fraud, or to evade statutory, contractual or tort responsibility.'"²⁰ As a result, the court of appeals found no error and affirmed the superior court's grant of summary judgment.²¹

2. Application of the National Labor Relations Act Obligated the Eleventh Circuit to Apply Federal Law in Lieu of State Law Regarding Piercing the Corporate Veil. In National Labor Relations Board v. West Dixie Enterprises, Inc.,²² the International Brotherhood of Electrical Workers filed a charge of unfair labor practices against West Dixie Enterprises, Inc. ("West Dixie"), which prompted the National Labor Relations Board ("NLRB") to conduct an investigation of the matter. Following its investigation, the NLRB filed a complaint against West Dixie based on violations of sections 8(1) and 8(3) of the National Labor Relations Act ("NLRA").²³ The NLRB subsequently added West Dixie's owner, sole shareholder and president, Carole Paolicelli, and her husband, Paul Paolicelli, West Dixie's director of operations, as defendants because the NLRB believed that "the Paolicellis were alter egos of West Dixie and were therefore also liable for the violations."²⁴

Congress intended for the scope of the NLRB's statutory jurisdiction to be broad. "In passing the [NLRA], Congress intended to and did vest in the [NLRB] the fullest jurisdictional breadth constitutionally permissible under the Commerce Clause."²⁵ As a practical matter, it is easiest to determine whether jurisdiction is present under the NLRA by using the following test: "[J]urisdiction exists when gross interstate inflow (purchases) or outflow (sales), whether direct or indirect, exceeds $50,000.00 [in a one-year period]."²⁶ West Dixie did not contest that it made purchases in excess of $50,000 during 1994 and that the alleged violations took place in 1994. Therefore, the Eleventh Circuit Court of Appeals held that the NLRB appropriately exercised its jurisdiction over West Dixie and the Paolicellis, but from a purely corporate perspective, the intriguing aspect of this case rests in the NLRB's application of the NLRA to pierce the corporate veil. ²⁷

The Paolicellis argued that under applicable state law veil-piercing theories, they would not be personally liable for the NLRA violations.²⁸ However, the NLRB refused to apply state law and instead applied "the Tenth Circuit's two-pronged test for determining whether owners or operators of a corporation are personally liable for the unfair labor practices of the corporation."²⁹ Under the Tenth Circuit's test:

the corporate veil may be pierced when: (1) there is such unity of interest, and lack of respect given to the separate identity of the corporation by its shareholders, that the personalities and assets of the corporation and the individuals are indistinct, and (2) adherence to the corporate form would sanction a fraud, promote injustice, or lead to an evasion of legal obligations.³⁰

The first prong required the NLRB to consider "(a) the degree to which the corporate legal formalities [had] been maintained, and (b) the degree to which individual and corporate funds, other assets, and affairs [had] been commingled."³¹ According to the record, "[t]he Paolicellis often used personal checks or credit cards to pay for West Dixie's supplies and payroll . . . [and] produced no records indicating that any of [the] payments were bona fide loans or repayments, or that the individual and corporate entities were kept separate."³² While a failure to maintain adequate records may have justified piercing the corporate veil alone, the discovery of commingled funds provided an even stronger case.³³

Moreover, the second prong...