Business Associations: Veil Piercing in Georgia

• Publication year: 2022

Business Associations: Veil Piercing in Georgia

Judd F. Snierson

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Business Associations: Veil Piercing in Georgia

Judd F. Sneirson^*

I. Abstract

This year saw few developments in Georgia corporate law.¹ The one reported case on the topic involved veil piercing and related doctrines—nothing novel, but an opportunity to review and clarify this important area of Georgia law.

II. Introduction

In Lowery v. Noodle Life, Inc.,² plaintiff Hee Jin Lowery badly burned herself when the seafood noodle soup she bought from a college Park restaurant spilled.³ The resulting lawsuit against the restaurant's corporate entity, shou & shou, Inc., alleged that the restaurant improperly packaged the to-go soup, and the restaurant settled the claims against it for $1 million.⁴ This judgment went unsatisfied, however; there were issues with the restaurant's insurance coverage, the restaurant had been sold, and the corporation had few other assets.⁵ And so, plaintiffs pursued the College Park restaurant's Decatur location, a

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separate restaurant not involved in the accident and run by a separate corporation, Noodle Life, Inc.⁶ The DeKalb County State Court granted Noodle Life's motion for summary judgment, and the Georgia Court of Appeals affirmed that decision.⁷

Plaintiffs based their claims against Noodle Life (the corporation operating the Decatur restaurant) on: veil piercing ("alter ego"), agency-law, and joint-venture theories.⁸ Plaintiffs had a few helpful facts: both corporations were owned by the same three shareholders (siblings Lena Shou Kuo, Lili Shou, and Lenny Shou), the Decatur location did some food preparation for both restaurants, and the restaurants may have shared an online ordering system. They also used the same menu and the same recipes. But the two businesses were legally, financially, and for the most part operationally distinct—they maintained separate finances, bore their own expenses, had separate staffs and payrolls, and they each, separately, complied with corporate formalities such as corporate records and procedures.⁹ This fell short of the showing required on any of plaintiffs' theories to hold Noodle Life responsible for Shou & Shou's tort liability.¹⁰

While the case may be unremarkable legally, it does offer an opportunity to review and assess corporate veil piercing and related issues under Georgia law. This Article will proceed as follows: Part III will review Georgia law on piercing the corporate veil; Part IV will address the related (but less common) theory of enterprise liability actually asserted in Lowery; Part V will cover other piercing issues; and Part VI will address the Lowery plaintiffs' agency-law and joint-venture theories.

III. Piercing in Georgia

Shareholders are not normally responsible for corporate debts beyond the amount they have invested.¹¹ In that sense, shareholders enjoy limited liability, though of course corporations are unlimitedly liable for their own debts, just as shareholders are unlimitedly liable for their own debts. This follows from the premise that a corporation is its own legal

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entity, distinct from its shareholders,¹² and normally one "person" is not responsible for another person's legal obligations.¹³

However, where shareholders fail to respect the legal and financial separateness of the corporate form, and that failure works a fraud or inequity on a corporate creditor, a court may likewise disregard the corporate form—colloquially, "pierce the corporate veil," or treat the corporation as the shareholders' "alter ego"—to hold shareholders personally liable for corporate obligations.¹⁴ Note that this was not sought in Lowery; plaintiffs did not seek to hold the Shou siblings personally liable for the Shou & Shou, Inc. settlement.¹⁵ Rather, plaintiffs sought to hold the siblings' separate Decatur restaurant, operated by Noodle Life, liable for the Shou & Shou tort.¹⁶

Georgia applies these principles using alter ego terminology:

To establish the alter ego doctrine it must be shown that the stockholders' disregard for the corporate entity made it a mere instrumentality for the transaction of their own affairs; that there is such unity of interest and ownership that the separate personalities of the corporation and the owners no longer exist; and to adhere to the doctrine of corporate entity would promote injustice or protect fraud.¹⁷

This boils down to a two-prong standard, as in other states: (1) whether the shareholders fail to respect the corporate form, and (2) whether that failure works a fraud or injustice upon a corporate creditor.¹⁸

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The first of these prongs—failing to respect the corporate form—presents itself in two ways: failing to respect the legal distinction between the shareholders and the corporation, and failing to respect the financial distinction between the shareholders and the corporation. As to the former, did the shareholders observe the formalities required of corporations? Did they hold board meetings, keep minutes of those meetings, issue stock certificates, and adopt and observe bylaws? Or did the shareholders act as if they are one and the same with the corporation, that these procedures and rules that accompany corporate status do not bind them?¹⁹

As to financial separateness, did the shareholders treat corporate finances as their own, fail to distinguish between personal and business accounts, or otherwise commingle personal and corporate funds? In other words, did the shareholders act as if they were financially the same as the corporation? Whether done innocently, negligently, or deliberately—for example, siphoning off corporate assets to leave the corporate treasury unable to satisfy its financial obligations—the failure to respect the financial separateness of the corporation also satisfies the first prong of the veil-piercing standard.

The "unity of interest and ownership language" in the block quote is common in veil-piercing standards, but it is not very helpful and is even a bit misleading.²⁰ In a one-shareholder corporation, there would of course be a perfect overlap between the shareholder's and the corporation's interests. There would likewise be unity of ownership where there is only one shareholder. Such an arrangement is acceptable, commonplace even, and should not in and of itself give rise to veil-piercing concerns.²¹ It is better to assess in the first prong whether the shareholders respected the corporation's legal and financial separateness.

The second prong of the veil-piercing standard is the equitable hook needed to invoke the extraordinary, equitable relief sought: disregarding a corporation's legal status. Here, one asks whether the shareholders'

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disregard of the corporate form has defrauded corporate creditors or otherwise worked an injustice upon them.²² Has the corporate form been abused such that equity requires a departure from the general rule on limited liability for shareholders? As a Georgia corporate-law treatise puts the question, has the business "overextended its privileges in the use of the corporate entity to defeat justice, to perpetrate fraud, or to evade statutory, contractual or tort responsibility."²³

Fraud is fairly self-explanatory,²⁴ but what constitutes injustice for veil-piercing purposes? one non-Georgia court described injustice this way:

[I]njustice means something less than an affirmative showing of fraud—but how much less? . . . . [S]ome "wrong" beyond a creditor's inability to collect would result: the common sense rules of adverse possession would be undermined; former partners would be permitted to skirt the legal rules concerning monetary obligations; a party would be unjustly enriched; a parent corporation that caused a sub's liabilities and its inability to pay for them would escape those liabilities; or an intentional scheme to squirrel assets into a liability-free corporation while heaping liabilities upon an asset-free corporation would be successful.²⁵

Commingling and intentional undercapitalization are common in successful veil-piercing cases,²⁶ and where such manipulation also involves ignoring the financial separateness of the corporate form, as it often will, the fact can do double duty on the first and second veil-piercing prongs.

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In addition, Georgia cases require the veil-piercing plaintiffs to show that the corporation whose veil is to be pierced was insolvent at the time of the transaction.²⁷ Otherwise, Georgia courts reason, a plaintiff would have an adequate remedy at law and need not invoke the equitable veil-piercing remedy.²⁸ In the language of the second prong, where is the fraud or injustice if a successful plaintiff can recover damages from the corporation?

As noted, the Lowery plaintiffs did not seek to hold Shou & Shou's shareholders personally liable for the College Park restaurant's negligence; that is, they did not technically seek to pierce Shou & Shou's corporate veil.²⁹ Nor does it seem that such a claim would have succeeded. Plaintiffs did not allege facts that speak to either of the two veil-piercing prongs, though they may have been able to make the required preliminary showing of Shou & Shou's insolvency.³⁰

IV. Enterprise Liability

The Lowery plaintiffs' pursuit of Noodle Life rests more on enterprise liability than veil piercing.³¹ In enterprise liability, a plaintiff aims to treat separate but...