Business Associations - Paul A. Quiros and Lynn Schutte Scott

• Publication year: 1994

Articles

Business Associationsby Paul A. Quiros^* and

Lynn Schutte Scott^**

This Article analyzes cases in the areas of corporate, partnership, securities, and banking law decided during the survey period by the Georgia Court of Appeals, the Georgia Supreme Court, the United States district courts in Georgia and the United States Court of Appeals for the Eleventh Circuit. Additionally, the Article highlights certain enactments by the Georgia General Assembly revising the Georgia Corporate Code.

I. Corporations

A. Piercing the Corporate Veil

The concept of piercing the corporate veil to hold shareholders personally liable for the debts of a corporation has been used by the Georgia courts in an attempt to avoid injustices. Unfortunately, the variety of fact situations coupled with legal principles used in these cases, which are undefined and often not applied, has encouraged disappointed trial court contestants to appeal hoping for a more favorable review. The unprincipled results of these cases cry out for guidance in this area.¹

The Georgia courts generally frame the issue as whether the corporation is the alter ego or business conduit of its owner.² To establish this, the courts require a showing that the shareholder's disregard of the corporate entity made it a mere instrumentality for the transfer of its own affairs; that there is such unity of interest and ownership that the separate personality of the corporation and the owner no longer exist; and that to adhere to the doctrine of a separate corporate entity would promote injustice or protect fraud.³ This determination is a jury question in Georgia.⁴ 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.⁵

In Brown v. Rentz,⁶ the court of appeals addressed claims of negligent construction and negligent misrepresentation in the sale of a residence.⁷ The Browns brought these claims against Rentz Builders, Inc., Lonnie Rentz, the sole shareholder, director and president of Rentz Builders, and Linda Rentz, its corporate secretary and listing and selling agent for the house in question.⁸ The trial court granted summary judgment to both Lonnie and Linda Rentz, individually, and the Browns appealed.⁹

The Browns contended that the house they purchased from Rentz Builders had structural problems, including a leaking roof and a flooded basement. Lonnie Rentz responded to their complaints by sending subcontractors to attempt to repair these problems, but the Browns eventually hired other contractors to repair the defects.¹⁰

The Browns argued that the Rentzes made knowing and false misrepresentations that Rentz Builders had constructed the house properly, using materials of good quality. Rentz Builders had no assets by this time, and Lonnie Rentz continued his construction activities in another corporate entity.¹¹

The trial court stated that the Browns failed to present evidence that either Lonnie or Linda Rentz, in their individual capacities, participated in the sale or disregarded the corporate entity of Rentz Builders in the transaction.¹² On appeal, the Browns argued that the individual defendants disregarded the corporate entity with respect to the construction and sale of the house, which would allow the court to pierce the corporate veil and hold individual defendants liable.¹³

The court of appeals decided that Linda Rentz should be protected by the "inherent purpose of incorporation [of] insulation from liability."¹⁴ The court of appeals reiterated its piercing analysis by stating that a corporation is an entity distinct from its shareholders, and to pierce the corporate veil, there must be some abuse of the corporate form.¹⁵ Sole ownership and control of a corporation is not a factor in the piercing analysis unless the separate personalities of the sole shareholder and the corporation cease to exist.¹⁶ Linda Rentz chose paint colors, hung wallpaper, and paid bills relating to the construction of the house. The court of appeals refused to find that this minimal role indicated either commingling of corporate and personal funds or disregard of the corporate form so as to allow piercing.¹⁷

The court of appeals next addressed the role of Lonnie Rentz. Although it disallowed piercing of the corporate veil because Rentz did not construct the house in his individual capacity, it held Lonnie Rentz personally liable, as a corporate officer, for either participating in the corporation's commission of a tort or directing its activities with respect to a tort.¹⁸ The court of appeals noted that Lonnie Rentz supervised the subcontractors, performed certain small tasks on the house during its construction, personally responded to the Browns' complaints, and performed some of the repair work.¹⁹ The court of appeals decided that, given these facts and his status as an officer of the corporation, a jury could also find Lonnie Rentz personally liable for the negligent construction "because he specifically directed the manner in which the house was constructed or participated or cooperated in its negligent construction."²⁰

In her concurrence, Presiding Judge Beasley stated that the majority reached the right result with respect to Lonnie Rentz but for reasons that the Browns did not raise in their complaint.²¹ The Browns argued that the corporate veil should be pierced because Lonnie Rentz was involved in the construction of the house, and Judge Beasley believed that some evidence existed that the corporation served as his alter ego and business conduit.²²

The decision in this case reflects the court of appeal's continued reluctance to pierce the corporate veil in negligent construction cases. Instead, the court searched for another cause of action to reach the same result of imposing personal liability on a corporate shareholder and officer. The court's analysis represents this reluctance, and Judge Beasley noted that the court stepped in to recharacterize the plaintiffs' arguments to reach a just result while refusing to subject the facts to a piercing analysis.²³ This case continues the Georgia courts' retrenchment from the decision in Hickman v. Hyzer²⁴ and indicates an increasingly favorable reception to pleadings that include alternative causes of action that avoid a piercing analysis.²⁵

In Matter of Adventure Bound Sports,²⁶ the United States District Court for the Southern District of Georgia allowed piercing of the corporate veil based on commingling of assets and the failure of a shareholder to operate the corporate entity as separate from himself.²⁷ This case involved two experienced scuba divers who died in an accident off the Savannah coast.²⁸ The captain of the boat decided to dive with the customers and left the diving instructor in charge of the boat.²⁹ Due to a miscalculation by the diving instructor, the boat drifted out of position and the divers were caught in the idling engine.³⁰ Andre Smith, the sole shareholder and officer of Adventure Bound Sports, Inc. ("Adventure Bound"), knew that the captain and diving instructor sometimes reversed roles on diving expeditions.³¹ The district court found that Smith operated Adventure Bound as a sole proprietorship, indicated by his commingling of personal and corporate funds and his failing to distinguish Adventure Bound as a corporate entity in his banking relationships.³² Additionally, the accident occurred in June 1989 and Adventure Bound had been administratively dissolved in March 1988.³³ Smith applied for reinstatement of the corporate status of Adventure Bound in November 1989.³⁴ The district court found that Smith reinstated the corporate entity solely to avoid liability for the accident.³⁵

The district court pierced the corporate veil and held Smith personally liable based on evidence that Smith abused the corporate form by disregarding the separateness of the corporation through his commingling of assets³⁶ and using the corporate entity to evade tort liability.³⁷ This case presents facts flagrant enough to allow the court to apply a piercing analysis without the need to explore other options.³⁸

In Fulton Paper Co. v. Reeves,³⁹ the court of appeals determined that the administrative dissolution of a corporation did not allow piercing of the corporate veil.⁴⁰ Reeves served as president of May Fresh Services, Inc., a Georgia corporation which was administratively dissolved in January 1992.⁴¹ Subsequent to the dissolution, May Fresh could continue to exist solely to wind-up and liquidate its business.⁴² Reeves, however, continued business as usual on behalf of May Fresh and purchased paper goods from Fulton Paper Company on the May Fresh account.⁴³ The court of appeals found these activities inconsistent with the wind-up of May Fresh's business.⁴⁴ Fulton Paper brought suit for payment against Reeves doing business as May Fresh, and Reeves denied personal liability.⁴⁵ In August 1992, May Fresh applied for reinstatement of its corporate status pursuant to Section 14-2-1422 of the Official Code of Georgia Annotated ("O.C.G.A.").⁴⁶ The trial court refused to find Reeves personally liable for May Fresh's debts and determined that reinstatement required the treatment of May Fresh as an existing corporation for purposes of the lawsuit.⁴⁷ Proper reinstatement related back to the effective date of administrative dissolution as if it had never occurred.⁴⁸

The court of appeals affirmed but based its decision on the continuation of corporate existence after administrative dissolution.⁴⁹ The court of appeals refused to impose personal liability on Reeves through an agency⁵⁰ , ultra vires⁵¹ , or piercing⁵² analysis. The court of appeals found that Fulton Paper dealt with May Fresh as a corporate entity at all times; consequently, there was no abuse of form to allow application of a piercing analysis.⁵³

B. Administrative Dissolution Issues

In two...