Business Associations - Paul A. Quiros, Lynn Schutte Scott, and Lora A. Tarle

• Publication year: 1997

SURVEY ARTICLES

Business Associationsby Paul A. Quiros^* Lynn Schutte Scott^** and Lora A. Tarle^***

This Article surveys recent developments in Georgia law in the areas of corporate, partnership, securities, and banking law.¹ It covers noteworthy cases decided during the survey period by Georgia state and appellate courts, United States district courts located in Georgia, and the Eleventh Circuit Court of Appeals. Also included are legislative enactments by the Georgia General Assembly revising the Official Code of Georgia Annotated ("O.C.G.A.").

I. Corporations

A. Piercing the Corporate Veil

Georgia courts will often pierce the corporate veil, thereby disregarding the corporate entity, to hold its shareholders personally liable. Veil piercing is commonly relied upon to prevent use of the corporate form to perpetrate fraud or other injustice. In determining whether to disregard the corporate entity, Georgia courts often apply the alter ego doctrine. The inquiry is whether the corporation acted as the alter ego or business conduit of its owner. Decisions addressing the issue are unpredictable, often yielding inconsistent results.

1. Georgia Supreme Court Emphasizes that the Alter Ego Theory is Distinct from Agency and Joint Venturer Theories of Liability. The Georgia Supreme Court recognized the confusion apparent in cases applying the alter ego doctrine in Kissun v. Humana, Inc. ,² a medical malpractice and wrongful death action against parent corporation Humana, Inc., its wholly-owned subsidiary Humana Hospital-Newnan, and an individual physician. The court of appeals had concluded that because there was no evidence justifying piercing the corporate veil between parent and subsidiary, there could be no claim against the parent under agency or joint venturer theories.³ The Georgia Supreme Court granted certiorari to consider whether a parent corporation can be held liable for the acts or omissions of a wholly-owned subsidiary corporation under theories of apparent or ostensible agency or joint venturer although evidence is insufficient to pierce the corporate veil.⁴

The supreme court held that insufficient evidence to pierce the corporate veil does not automatically preclude parent corporation liability under agency or joint venturer theories.⁵ The court noted that confusion often arises because alter ego, agency, and joint venturer theories are closely intertwined.⁶ "In discussing the alter ego doctrine, the courts frequently invoke the term 'agency' in the context of the subsidiary corporation having been so organized and controlled and its business conducted in such a manner as to make it merely an agency, instrumentality, adjunct, or alter ego of another corporation."⁷ While there are situations in which evidence that supports veil piercing also establishes an agency relationship between the parties, the theories are distinct. The court remanded the case for consideration of whether evidence existed that the subsidiary hospital acted as an agent or was a joint venturer with parent Humana, Inc. to allow a finding of liability in the absence of veil-piercing factors.⁸

2. Requisites for Piercing Corporate Veil Not Met. In NEC

Technologies, Inc. v. Nelson,⁹ the supreme court again reversed the court of appeals finding that NEC Technologies, Inc. ("Technologies"), an importer of electronic components, was not the alter ego of NEC Ltd., manufacturer of the components.¹⁰ Plaintiffs sued Technologies, but not manufacturer NEC Ltd., for injuries arising from a fire allegedly caused by defective electrical components in a Curtis Mathes television set.¹¹ Because the supreme court's review of the record revealed that Technologies and NEC Ltd. had not commingled funds nor shared officers and employees, the evidence did not suggest that Technologies acted as the alter ego of NEC Ltd. by importing the components.¹² Plaintiffs' assertion that NEC Ltd. performed its business in the United States through Technologies and a Curtis Mathes agent's inability to distinguish between the entities did not create a question of fact on the issue.¹³

Although neither of these cases clarified the Georgia courts' application of veil-piercing doctrines, these cases are noteworthy as indicators of the extension of allegations of veil piercing by plaintiffs in noncon-struction related cases.

B. Successor Liability: Under "De Facto Merger" or "Mere Continuation" Theories, Second Insurer Succeeded to Liabilities of First Insurer as Result of Reorganization

In Dickerson v. Central United Life Insurance Co.,¹⁴ a fraud action against Life of America Insurance Co., the court applied de facto merger and mere continuation theories to justify its amendment of a pretrial order to name Central United as the defendant in the fraud action.¹⁵ The court found that even though the parties had structured their consolidation transaction as a purchase of assets, Central United had succeeded to the liabilities of Life of America under either de facto merger or mere continuation theories as a result of Life of America's acquisition of Central United, consolidation of the companies into a single entity operating under the Central United name, and bulk reinsurance by Central United of all of Life of America's policies.¹⁶

The court noted the general rule that a purchasing corporation does not assume liabilities of seller unless: (1) there is agreement to do so; (2) the transaction is a merger; (3) the transaction is a fraudulent attempt to avoid liabilities; or (4) the purchaser is a mere continuation of the predecessor corporation.¹⁷ The court found that the relationship between Life of America and Central United supported the finding that Central United succeeded to the liabilities of Life of America.¹⁸

First, the court found that the bulk reinsurance and consolidation transaction met the requisites of a de facto merger because "there was and remains a continuity of management, assets, business, physical location, and shareholders between the now defunct entity Life of America and the new entity known as Central United."¹⁹ Second, the court concluded that the newly consolidated entity, Central United, was a "mere continuation" of Life of America.²⁰ The test for whether one corporation is a mere continuation of another is "whether there is a continuation of the corporate entity of the seller" with the key element being "a continuity of officers, directors, and shareholders."²¹ Noting that Georgia law recognizes common law continuation when there is some identity of ownership, the court found complete identity of ownership and virtual identity in management between Central United and the former Life of America.²² Thus, amendment of the fraud action to add Central United as a party was proper.²³ This case illustrates that courts may look through the structure of a transaction agreed upon by the parties if the elements of a de facto merger are present in order to find continued liability.

C. Imputation of Employee Acts and Omissions to Corporation

1. Attorney-Shareholders in Professional Corporation Not Personally Liable for Professional Misconduct of Majority Shareholder Attorney. The Georgia Supreme Court considered whether shareholder-members of a law firm organized as a professional corporation can be held jointly and severally liable to a client for the professional misconduct of another shareholder in the firm in Henderson v. HSI Financial Services, Inc.²⁴ HSI sued a law firm and its three shareholders individually to recover for the majority shareholder's failure to pay HSI money due under a note representing money collected by the firm on HSFs behalf.²⁵ HSI prevailed in the lower court against the two uninvolved shareholders who appealed this decision to the supreme court.²⁶

Before Henderson, a member of a firm organized as a professional corporation was personally liable for the professional misconduct of other lawyers in the firm.²⁷ In Henderson the Georgia Supreme Court overruled its earlier holding in First Bank & Trust Co. v. Zagoria²⁸ and rejected this rule of strict liability as inconsistent with the Georgia Professional Corporations Act.²⁹ The court stated that although it has the regulatory authority to define the group structure in which lawyers practice, such as a partnership or professional corporation, relevant statutes govern whether a particular structural form excepts its members from personal liability.³⁰ The court held that lawyers practicing as shareholders in a professional corporation have the same rights and responsibilities as shareholders in other professional corporations.³¹

The Georgia Professional Corporations Act provides that such a corporation and its shareholders enjoy the same rights, privileges, and immunities as shareholders of business corporations.³² The Georgia

Business Corporation Act,³³ in turn, provides that "a shareholder of a corporation is not personally liable for the acts or debt of the corporation except that he may become personally liable by reason of his own acts or conduct."³⁴ The court concluded that the two shareholders were not jointly and severally liable for the professional misconduct of the majority shareholder.³⁵ The court noted that its holding did not undermine protection of the client because a lawyer practicing in a professional corporation remains personally liable to clients for his own acts of professional negligence and the professional corporation itself is liable to the extent of its corporate assets for the malpractice of its members.³⁶

2. Criminal Conviction of Corporation for Theft of Timber Upheld. In Davis v. State,³⁷ defendant Ronald Davis Logging Company, Inc. ("Davis Logging") unsuccessfully challenged its conviction on two counts of theft of timber. This case illustrates the principle that a corporation may be prosecuted for an act or omission constituting a crime if an agent of the corporation performs the act that is an element of the crime while acting within the scope...