Business Associations - Paul A. Quiros, Lynn Schutte Scott, and Gregory M. Beil

• Publication year: 1996

SURVEY ARTICLES

Business Associationsby Paul A. Quiros^* Lynn Schutte Scott^** and Gregory M. Beil^***

This Article surveys noteworthy cases that the Georgia Appellate Courts, the United States District Courts in Georgia, and the United States Court of Appeals decided during the survey period¹ as they relate to Georgia corporate, partnership, securities, and banking laws. It also 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.² The courts, however, have failed to define precise standards to apply to rather predictable factual scenarios. Consequently, the results of appellate review often seem contradictory and confused; therefore, parties who are unsuccessful at the trial court level often find it is worth the expense of an appeal to test the law on the veil-piercing issue.³

Georgia courts generally frame the issue as whether or not the corporation is the alter ego or business conduit of its owner.⁴ The principal inquiry is not the composition of corporate ownership or control because, under Georgia law, a corporation and its shareholders or officers are distinct entities, even if the corporation is wholly owned and controlled by an individual.⁵

To establish a successful claim to pierce a corporate veil, the plaintiff must show that the shareholder's disregard of the corporate entity made it a mere instrumentality for the transaction of the shareholder's own affairs; that there is such unity of interest and ownership that the separate personalities of the corporation and the owner or officer no longer exist; and that to adhere to the doctrine of a separate corporate entity would promote injustice or protect fraud.⁶ 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.⁷

1. Veil-Piercing Theory Invoked to Hold Corporation Liable for Acts of an Employee of its Sister Corporation which Disregarded its Separate Corporate Identity. In Mark Six Realty Associates, Inc. v. Drake,⁸ the Georgia Court of Appeals drew upon the alter ego prong of veil-piercing theory and affirmed the lower court's decision to hold a limited purpose corporation equally liable for the acts of an employee of its sister corporation. Appellee, Lynn A. Drake ("Drake") won a favorable jury verdict against Mark Six Realty Associates, Inc. ("Mark Six"), formerly known as Northside Realty Associates, Inc. ("Associates, Inc."), Northside Realty, Inc. ("Northside Realty"), and five other defendants. Among other things, Drake alleged breach of contract, negligence, and breach of warranty in connection with her purchase of a new home.⁹ The case stemmed in part from the actions of a real estate agent, Matsis, who the trial court found was acting as an employee of Associates, Inc. Northside Realty, Inc., appealed the lower court's denial of its motion for judgment notwithstanding the verdict, contending that the lower court erred in denying its motion because Northside Realty was a separate and distinct corporation from its sister corporation, Associates, Inc.¹⁰ The appellate court disagreed and affirmed the lower court's denial.¹¹

After the events giving rise to Drake's action, Associates, Inc. changed its corporate name to Mark Six Realty Associates, Inc. Northside Realty was formed as a separate corporation, although it did share common owners, a common address, and some duplication of corporate officers and directors with its sister corporation, Associates, Inc. Testimony from the president of Associates, Inc., who was also the executive vice president of Northside Realty, indicated that Northside Realty was created "specifically to hold the active licenses of [real estate] agents who were not active as agents for the status purpose of the Georgia Real Estate Commission."¹² Agents whose licenses were assigned to Northside Realty worked under contracts with Northside Realty that specifically prohibited them from being "active in the real estate business other than to refer customers" to Associates, Inc.¹³ The evidence indicated that Northside Realty's sole purpose was to circumvent regulations of the Georgia Real Estate Commission that required these agents either to sit for a relicensing exam or to pay to keep their real estate licenses active.¹⁴

Northside Realty argued that because it neither had employees nor operated as a business, it could not take action on its own behalf to enter into a contract, to mislead, or to confuse its name and business with that of Associates, Inc.¹⁵ The tone of the appellate court's decision indicates that without more evidence that Northside Realty was merely the alter ego of Associates, Inc., piercing the corporate veil to integrate the separate identities of Associates, Inc. and Northside Realty may have been inappropriate. However, the evidence before the trial court indicated a level of disregard by Associates, Inc. of its separate corporate identity that was sufficient to justify treating the sister corporations as a common business enterprise.¹⁶ Generally, common ownership or control is not a sufficient basis to integrate independent corporate identities; however, this case had overtones drawing upon the business conduit and evasion of contractual, statutory or tort justifications for veil-piercing.¹⁷ Thus, although not neatly confined to a discrete veil-piercing theory, this case demonstrates the importance of maintaining the separate corporate identities of sister corporations under common ownership and control.

The court was bound by a highly deferential standard of review in reaching its decision on whether any evidence presented below supported the jury's verdict when construed in a light most favorable to Drake, the prevailing party.¹⁸ The appellate court explained:

[Tjhere was . . . evidence that the name of Northside Realty, Inc. was confused with that of [Associates, Inc.] by such actions as the general use of an ambiguous name which could be that of either corporation, the use of printed brochures containing the Northside Realty, Inc. name, and the use of "Northside Realty, Inc." in several written agreements [used by Matsis, the agent-employee of Associates, Inc.]. We cannot say that any of these facts, standing alone, would constitute sufficient evidence to put to the jury the question of Northside Realty, Inc.'s liability either as a member of a common business enterprise, or as the alter ego or business conduit of [Associates, Inc.]. But taken as a whole, we likewise cannot say that no evidence exists to support the jury's verdict or that the evidence demands a verdict in favor of Northside Realty, Inc. on this issue.¹⁹

The foregoing statement by the court recognizes that the concept of piercing the corporate veil to hold sister corporations jointly and severally liable is not neatly confined to a single veil-piercing theory or justification. A judicial integration of veil-piercing theories to produce new and distinct justifications for piercing the corporate veil would help courts evaluate whether the veil-piercing issue was properly submitted to a jury and would lend more certainty to a party considering appeal of an unsuccessful claim.

2. Corporate Veil Pierced on Fraud or Abuse Grounds. In J-Mart Jewelry Outlets, Inc. v. Standard Design,²⁰ the Georgia Court of Appeals held that in an action brought by suppliers of a corporation against the corporation and its major shareholders alleging joint and several liability for open accounts, fraud, and racketeering, as evidenced by theft and mail fraud, the question of whether or not to pierce the corporate veil to reach the assets of a corporation's shareholders constituted a jury question if evidence existed that shortly before the corporation went out of business, the corporation paid off the balance on a shareholder's personal credit card and made unauthorized payments on the shareholder's car to the personal benefit of the shareholder.²¹

The defendants, Diamond Jim Halter ("Halter"), individually and d/b/a Diamond Jim's Emporium, moved for a directed verdict on the veil-piercing issue. The trial court denied this motion based on sufficient evidence of fraud and abuse of corporate form to submit the question of whether to pierce the corporate veil to the jury. The jury, in turn, pierced the corporate veil to find Halter individually liable for the corporation's debts to certain suppliers. On appeal, Halter argued that the evidence did not demonstrate the level of impropriety required to submit the veil-piercing claim to the jury. The appellate court dismissed Halter's contention, finding that Halter knowingly caused the corporation to pay his credit card bill eight days before the corporation ceased business.²² The corporate check used to pay the bill was marked "Payment in Full: Jim's Personal."²³ The evidence also established that the corporation, knowing that it would soon go out of business, purchased a new Cadillac for Halter's use and then transferred title to him for insufficient consideration.²⁴

In Pope v. Professional Funding Corp.,²⁵ Professional Funding Corporation ("PFC") purchased the accounts receivable of Total Care, Inc. ("TCI"). PFC brought suit against TCI and its shareholders, alleging conversion and breach of contract.²⁶ TCI shareholders and its financial manager, Lonnie Pope ("Pope"), appealed from judgments entered on jury verdicts against them. The jury pierced TCFs corporate veil to hold related entities and their owners, including Pope, personally liable for over $100,000 for TCFs failure to repurchase certain uncollected accounts receivable...