Business Associations - Paul A. Quiros, Lynn S. Scott, and James F. Brumsey

• Publication year: 2001

Business Associationsby Paul A. Quiros^*

Lynn S. Scott^** and

James F. Brumsey^***

This Article surveys recent developments in the corporate, securities, partnership, and banking law of Georgia. It covers noteworthy cases decided during the survey period¹ by the Georgia appellate courts, United States district courts located in Georgia, and the Eleventh Circuit Court of Appeals. This Article also surveys the recent revisions to the Official Code of Georgia Annotated ("O.C.G.A.") enacted by the Georgia General Assembly.

I. Corporations

A. Piercing the Corporate Veil

A corporation generally has its own legal existence, separate and distinct from that of its owners.² This legal fiction allows the owners of the corporation to enjoy limited liability and generally not be called upon to answer for the debts of the corporation.³ This shield against investor liability is not impenetrable. On the contrary, courts have repeatedly demonstrated a willingness to "pierce the corporate veil" and hold the owners liable in order to prevent them from using the corporate form to perpetrate fraud or other injustice.⁴ In so doing, the courts generally query whether the corporation is a mere alter ego or business conduit of a person.⁵ If so, then the corporate veil may be pierced, and the owners may be held personally liable for corporate debts.⁶ During the survey period, the Georgia courts did not break any new ground or substantially change Georgia law with respect to piercing the corporate veil; however, the cases set forth below illustrate the facts that the courts found persuasive in applying the doctrine.

1. Jury Verdict Piercing the Corporate Veil Upheld. In Soerries v. Dancause,⁷ the Georgia Court of Appeals upheld a jury verdict awarding damages and piercing the corporate veil to hold the sole shareholder of a nightclub liable under Georgia's dram shop laws.⁸ In Soerries the stepfather of a nightclub patron, who died as a result of an automobile accident after leaving a nightclub intoxicated, brought suit against the operator of the nightclub and its sole shareholder for compensatory and punitive damages resulting from the patron's death. In 1996, Aubrey Lynn Pursley, then eighteen years old, entered the Chickasaw Club in Columbus while intoxicated and was not asked to show identification upon her entrance. She subsequently drank additional alcoholic beverages and left the bar visibly intoxicated with a beer in her hand. Pursley died after she lost control of her vehicle and collided with a tree. The jury pierced the corporate veil and held the club operator and its sole shareholder jointly liable for $6500 in compensatory damages and found the shareholder solely liable for $187,500 in punitive damages.⁹

In affirming the jury's verdict, the court reiterated the requirements for piercing the corporate veil, stating: '"There must be evidence of abuse of the corporate form. Plaintiff must show that the defendant disregarded the separateness of legal entities by commingling on an interchangeable or joint basis or confusing the otherwise separate properties, records or control.'"¹⁰ The court acknowledged that '"great caution should be exercised by the court in disregarding the corporate entity[,]'" but also stated that the issue of whether to pierce the corporate veil should be left to the jury, '"unless there is no evidence . . . to justify disregarding the corporate form.'"¹¹

In Soerries the court found there was sufficient evidence for the jury to pierce the corporate veil.¹² The court was persuaded by the following facts: (1) employees of the club were paid in cash by Soerries out of the proceeds of the club, which payments were not reported in the club's payroll records; (2) some employees were paid completely "under the table" and were not reflected as employees in the club's records; (3) Soerries, explaining how the club paid its bills while at the same time reporting losses on its tax returns, stated that he often paid the corporate expenses out of his personal funds; and (4) Soerries did not receive the full rental value of the property from the operator even though he paid the full monthly mortgage on the property, which exceeded the rental payments received from the operator.¹³ These facts taken together raised a jury question as to whether Soerries disregarded the separateness of the corporate entity.¹⁴ As such, the court found the evidence sufficient to sustain the verdict.¹⁵

2. Judgment as a Matter of Law Inappropriate Where Issues for Jury Existed as to Whether Corporate Veil Should be Pierced. In Dews v. Ratterree,¹⁶ the court of appeals reversed the trial court's grant of summary judgment against a plaintiff seeking to pierce the corporate veil.¹⁷ Henry Dews, III originally sued Mike's Garage Door Company, Inc. ("Mike's Garage Doors")¹⁸ for damages resulting from Dews' loss of some of his fingers while attempting to repair a garage door opener installed in his home by Mike's Garage Doors. Mike's Garage Doors, however, was insolvent at the time Dews' original lawsuit was filed and was therefore judgment-proof. Dews subsequently brought suit against Mike Ratterree and his wife personally, seeking to pierce the corporate veil. The Bibb County Superior Court granted summary judgment to the Ratterrees, and Dews appealed.¹⁹

As an initial matter, the appellate court rejected as conclusory three of Ratterree's contentions contained in his affidavit in support of his motion for summary judgment, namely the following: (1) he has always operated Mike's Garage Doors as a separate and distinct entity; (2) he has never commingled funds from Mike's Garage Doors with his own personal funds; and (3) the corporation has never been used to perpetrate fraud, confuse or avoid judgment creditors, or avoid liability.²⁰ The court then found at least three jury issues present, making the trial court's grant of summary judgment inappropriate.²¹ First, Mr. Ratterree maintained in his deposition that corporate monies, which he deposited in his personal checking account, resulted from loans he made to the corporation. The Ratterrees did not, however, present any documentary evidence at trial that loans were made to the corporation or that any repayments were made. Second, Mr. Ratterree stated in his deposition that Mike's Overhead Doors, Inc. ("Mike's Overhead Doors") made payments on loans to Mike's Garage Doors for which the Ratterrees were personally liable. Finally, Mike's Garage Doors paid for and used trucks that Mr. Ratterree purchased in his name and depreciated personally for tax purposes.²² These facts taken together presented jury questions concerning whether "Mr. Ratterree commingled the assets of Mike's Garage Doors with his own; acted to confuse Mike's Garage Doors, Mike's Overhead Doors, and himself as separate legal entities to avoid judgment creditors; and used Mike's Garage Doors as an instrumentality for the transaction of his own personal affairs."²³ As such, the court found that issues of fact were present for the jury to determine whether to pierce the corporate veil and that the trial court's grant of summary judgment was inappropriate.²⁴

The appellate court again reversed a trial court decision to remove from the jury the question of whether to pierce the corporate veil in Atlantic Coast Cable, Inc. v. Mallory.²⁵ In this case, Atlantic Coast Cable and Richard R. Wilbanks (collectively "Atlantic") brought suit against Peter Mallory and Leonard Watts in an effort to pierce the corporate veil of Questar, Inc. Plaintiffs sought to recover personally from Mallory and Watts debts owed by Questar for work Atlantic previously performed outside of LaGrange, Georgia. The jury pierced the corporate veil and found against both defendants in the amount of $227,143.71. The trial court then granted the defendants' motion for a judgment notwithstanding the verdict ("j.n.o.v.") and Atlantic appealed.²⁶

Because the question of whether to pierce the corporate veil is a jury question, the appellate court would have to determine that no evidence showing abuse of the corporate form was put forth at trial in order to affirm the trial court's grant of j.n.o.v.²⁷ In this case, however, the court found evidence in the record showing abuse of the corporate form by Watts and Mallory and reversed the trial court's grant of j.n.o.v.²⁸ The following factors persuaded the court of appeals: (1) Mallory was not able to fully document his contention that payments totaling $330,000 made to him between May and August of 1989 represented repayments for loans he had made to Questar; (2) Watts received $200,000 from Questar in August 1989, which he used to buy a thirty-day certificate of deposit in his own name, and Watts paid personal income tax on the interest earned before returning the principal amount to Questar at the end of the thirty-day period; and (3) Mallory continued to sign documents as the president of Questar in 1989 after he was no longer president of the corporation.²⁹ The court found the jury was entitled to consider these issues in reaching its determination to pierce the corporate veil, thus making the trial court's grant of j.n.o.v. inappropriate.³⁰

3. Piercing of Corporate Veil Denied—No Personal Liability for Shareholders. Although Georgia courts are willing to allow piercing of the corporate veil in situations when there has been abuse of the corporate form, they will respect the separateness of the corporate entity when the facts do not evidence such abuse. In Hayes v. Collins,³¹ the court of appeals affirmed the trial court's grant of summary judgment against a plaintiff seeking to pierce the corporate veil of a corporation under circumstances in which the sole shareholder and president of the corporation was a mistress of the plaintiff's husband and had received loans on behalf of the corporation from the husband.³² Hayes sued Collins, the corporation's president, personally for repayment of the loan made by Hayes'...