Business Associations - Paul A. Quiros, Lynn Schutte Scott, and Daniel J. Babb

• Publication year: 1998

ARTICLES

Business Associationsby Paul A. Quirds^* Lynn Schutte Scott^** and Daniel J. Babb^***

This Article surveys noteworthy cases that the Georgia appellate courts, the United States district courts located in Georgia, and the Eleventh Circuit 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. The courts, however, have failed to define precise standards to apply to rather predictable factual scenarios. Consequently, the results often seem contradictory and confused.²

Georgia courts generally frame the issue as whether the corporation is the alter ego or business conduit of its owner.³ 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 wholly-owned and controlled by an individual.⁴

To establish a claim to pierce the corporate veil, the plaintiff must show: (1) that the shareholder's disregard of the corporate entity made it 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 personality of the corporation and the shareholder or officer no longer exist; and (3) that to adhere to the doctrine of a separate corporate entity would promote injustice or protect fraud.⁵

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."⁶

Every year there are a number of reported cases in which a claimant seeks to pierce the corporate veil to reach the assets of a corporation's shareholders. The inquiry is a jury question, and often these claims are tried in the course of litigation, although they may not be the main claim in a case. This activity will continue and be encouraged so long as the legislature and the courts do not develop a more workable set of legal standards to apply to veil-piercing claims.

1. The United States District Court for the Southern District of Georgia Invokes the Veil-Piercing Theory to Hold a Principal Liable for Acts of a Corporation. In Chemtall, Inc. v. Citi-Chem, Inc.,⁷ the United States district court refused to allow a New Jersey corporation's sole shareholder and chief executive officer to hide behind the corporate veil and avoid liability for his fraudulent acts.⁸ Plaintiffs, Chemtall, Inc. and Pearl River Polymers, Inc., sued Citi-Chem and Calvin M. King (individually as chief executive officer of Citi-Chem) for failing to abide by a lockbox payment agreement entered into by the parties.⁹

Chemtall, a Riceboro, Georgia company, and Pearl River Polymers, a corporation owned by Chemtall, manufactured water-treatment polymer products. Citi-Chem had an agreement with both companies to buy their products and distribute the products under the "Citi-Chem" trade name. Under a lockbox payment agreement, Citi-Chem would invoice its customers with instructions to remit their payments to a Georgia bank lockbox. From there the money would be divided pursuant to the parties' agreement.¹⁰ The arrangement provided that a "managing agent" would remove the funds from the lockbox and send each of the parties their appropriate share.¹¹ Although King originally acted as the lockbox's managing agent, Chemtall and Pearl River soon realized that King was slow in forwarding their share, and they replaced him as managing agent with Chemtall.¹² After the change, Chemtall and Pearl River "performed all lockbox accounting activity in Georgia, and from there sent checks to Citi-Chem in New Jersey."¹³

A few years after Chemtall took over as managing agent of the lockbox, King began violating the original payment agreement.¹⁴ King, without the knowledge of Chemtall, directed its customers to send their payments to a New Jersey address.¹⁵ According to testimony from former Citi-Chem employees, Citi-Chem would send an invoice to its customers directing them to send all payments directly to a bank account set up by Citi-Chem in New Jersey.¹⁶ A copy of the invoice showing the correct lockbox address would be sent to Chemtall and Pearl River to cover up the scheme.¹⁷

During the same period that King was diverting the customer payments to Citi-Chem, he was also diverting corporate resources to himself. King directed his employees to set up a bank account in the name of Citi-Chem, Inc., D.C. ("CCI-DC") to receive the diverted customer payments. From this account King transferred to himself a "consulting fee" of $45,000, which he used to fund a separate business, King's Liquors.¹⁸ He also used $6,000 of the funds in the CCI-DC account to purchase a BMW and "transferred two [new] automobiles out of Citi-Chem and into his own name."¹⁹

Claiming a $152,082.80 arrearage and breach of contract, Chemtall and Pearl River sued Citi-Chem and King in a Georgia state court and obtained several Temporary Restraining Orders ("TROs").²⁰ Citi-Chem notified its customers to disregard the TROs and to continue sending payments to the CCI-DC account.²¹ Shortly thereafter, Citi-Chem filed for bankruptcy protection in New Jersey.²² King invoked the corporate veil defense claiming that he signed the lockbox agreement in his capacity as Citi-Chem's president and that only the bankrupt corporation was subject to liability.²³

In order for a plaintiff to be successful in a veil-piercing claim, the plaintiff must show that the defendant disregarded the corporate form.²⁴ In the past, Georgia courts have held that the corporate veil is sufficiently pierced when "a corporate officer participates with his corporation in wrongfully converting another's property."²⁵ Under this analogy, the district court refused to allow King the protection of the corporate veil.²⁶ The court held that Chemtall and Pearl River produced sufficient evidence to prove that King abused the corporate veil and subjected himself to personal liability by commingling the corporation's funds with his own and directing the corporation to perpetrate fraud upon its creditors and to evade contractual responsibility.²⁷

2. Court Finds Sole Shareholder Individually Liable for Executing Bad Check. In Kolodkin v. Cohen,²⁸ the Georgia Court of Appeals held that the president of a corporation can be held personally liable under O.C.G.A. section 13-6-15²⁹ for drafting a corporate check when the account contains insufficient funds to cover the check.³⁰ Cohen was the president, sole shareholder, and director of Amalgamated T-Shirts, Inc.³¹ Kolodkin and Amalgamated entered into a real property lease agreement. Amalgamated stopped doing business in October of 1995, when the corporate account did not have sufficient funds to cover the lease payment. As expected, the November payment was returned for insufficient funds. Kolodkin sued Cohen in his individual capacity under O.C.G.A. section 13-6-15 for drafting the check.³² O.C.G.A. section 13-6-15 provides as follows:

Notwithstanding any criminal sanctions which may apply, any person who makes, utters, draws, or delivers any check, draft, or order upon any bank, depository, person, firm, or corporation for the payment of money, which drawee refuses to honor the instrument for lack of funds or credit in the account from which to pay the instrument or because the maker has no account with the drawee, and who fails to pay the same amount in cash to the payee named in the instrument within ten days after a written demand therefor, as provided in subsection (c) of this Code section, has been delivered to the maker by certified mail shall be liable to the payee, in addition to the amount owing upon such check, draft, or order, for damages of double the amount so owing, but

in no case more than $500.00, and any court costs incurred by the payee in taking the action.³³

Although this Code section had not been interpreted in Georgia, the court found that the statute appeared to create a limited exception to the general corporate principle that an individual who signs in a representative capacity is not personally liable.³⁴ The court reasoned that nowhere in the Code was there any "language limiting liability for a maker acting in a representative capacity."³⁵ The court felt that had the Georgia General Assembly intended to limit liability of persons signing in a representative capacity, it would have done so in the Code.³⁶

3. Court Refuses to Pierce the Corporate Veil Without Evidence of Fraud. In General Insurance Services, Inc. v. Marcola,³⁷ the Georgia Court of Appeals was asked to reverse a grant of judgment notwithstanding the verdict for defendant, Karl Byers.³⁸ Plaintiff sued Karl Byers individually as president of a corporation that had breached a contract to purchase plaintiff's corporation.³⁹ Plaintiff claimed that "Karl Byers agreed to purchase plaintiff's [corporation] while concealing from her his intent to transfer his interest immediately to the third parties, ... to whom [she] had previously refused to sell her [business]."⁴⁰

The court refused to pierce the corporate veil and impose liability upon the buyer of a business.⁴¹ In its explanation the court argued that "[t]he corporation is prima facie a distinct legal entity with rights and liabilities which are separate from those of [its shareholders]."⁴² "One who deals with a corporation as such an entity cannot, in the absence of fraud, deny the legality of the corporate existence for the purpose of holding the owner liable."⁴³

According to the...