South Carolina Lawyer
SC Lawyer, November 2006, #3.
Piercing the Corporate Veil in South Carolina
South Carolina LawyerNovember 2006Piercing the Corporate Veil in South Carolinaby Shawn M. FlanaganThe recent case of Hunting v. Elders, 359 S.C. 217, 597 S.E.2d 803 (Ct. App. 2004) (certiorari granted Aug. 12, 2005; motion to dismiss granted Oct. 5, 2005), has updated the court created doctrine of piercing the corporate veil in South Carolina by taking into account the effect of a business electing (1) to be a statutory close corporation under state law and (2) a subchapter S corporation under tax law. Hunting is the first South Carolina case to apply the veil piercing doctrine to a subchapter S, statutory close corporation.
South Carolina provides by statute that an owner of a corporation or limited liability company is not personally liable for the acts or debts of the corporation or LLC. S.C. Code Ann. §33-6-220 and §33-44-303. "Piercing the corporate veil is a common law doctrine by which courts disregard the separate corporate entity in particular circumstances and impose liability on the participants behind the entity's veil." Thompson, Piercing The Veil Within Corporate Groups: Corporate Shareholders As Mere Investors, 13 Conn.J.Int'l L. 379, 383 (Spring 1999). The aim of this article is to make the application of the doctrine more understandable and to encourage business lawyers to provide their clients with guidance on how to avoid its application.
Please note that this article has been abridged for publication in the South Carolina Lawyer magazine. The original full length version of the article can be found at buistmoore.com and scbar.org.
Development of the Doctrine in South Carolina
The modern South Carolina test was first applied thirty years ago in DeWitt Truck Brokers v. W. Ray Flemming Fruit Co., 540 F.2d 681 (4th Cir. 1976), a federal case involving South Carolina law. The test was approved by the South Carolina Court of Appeals in Sturkie v. Sifly, 280 S.C. 453, 313 S.E.2d 316 (Ct. App. 1984) (although the court forgot to include one factor in its decision) and later endorsed by the South Carolina Supreme Court in Multimedia Publishing of S.C., Inc. v. Mullins, 314 S.C. 551, 431 S.E.2d 569 (1993).
" [P]iercing the corporate veil' is not a doctrine to be applied without substantial reflection." Baker v. Equitable Leasing Corp., 275 S.C. 359, 367, 271 S.E.2d 596, 600 (1980). There is a "general reluctance of courts to disregard the integrity of the corporate entity." Sturkie, 280 S.C. at 459, 313 S.E.2d at 319. "In general, a corporation and a shareholder are separate and distinct, and the debts of the corporation are not the debts of the shareholder. However, when the corporate veil is pierced, the corporation and the individual become one and the same. See DeWitt, 540 F.2d at 683. As they are identical, the liabilities of the corporation are the liabilities of the shareholder." Hunting, 359 S.C. at 230, 597 S.E.2d at 809-810.
General Description of the First Prong of the Test
State courts, as well as federal courts, in South Carolina use a two-prong test to determine whether a corporate entity should be disregarded. "The first prong is an eight factor analysis of the shareholder's relationship to the corporation." Multimedia Publishing of S.C., Inc., 314 S.C. at 553, 431 S.E.2d at 571. It is "designed to analyze the corporation's adherence to the corporate form." University Medical Associates of Medical University of S.C. v. UnumProvident Corp., 335 F.Supp. 2d 702, 707 (D.S.C. 2004). It "looks to observance of the corporate formalities by the dominant shareholders." Sturkie, 280 S.C. at 457, 313 S.E.2d at 318.
The conclusion to disregard the corporate entity must involve a number of the eight factors, but need not involve them all. Dumas v. InfoSafe Corporation, 320 S.C. 188, 192, 463 S.E.2d 641, 644 (Ct.App. 1995). "Neither Sturkie nor any other case cited by the parties has set forth the weight that must be accorded to each of the eight factors, nor has any case required that each factor be accorded equal weight with the others." Hunting, 359 S.C. at 225, 597 S.E.2d at 807. The eight factors will be discussed separately and later in this article in the context of the Hunting case.
General Description of the Second Prong of the Test
The second prong of the test "need not be reached until and unless the requirements of the first prong are met." Hunting, 359 S.C. at 225, 597 S.E.2d at 807. The second prong requires "that there be an element of injustice or fundamental unfairness if the acts of the corporation be not regarded as the acts of the individuals" and "is perhaps more elusive." Hunting, 359 S.C. at 228, 597 S.E.2d at 809. "The corporate form may be disregarded only where equity requires the action to assist a third party." Woodside v. Woodside, 290 S.C. 366, 370, 350 S.E.2d 407, 410 (Ct. App. 1986). "[F]undamental unfairness can exist in the absence of fraud [and] may be proved by a lesser showing than the defendant's reckless disregard for whether claims against the corporation exist." Multimedia Publishing of S.C., Inc., 314 S.C. at 554, 431 S.E.2d at 572.
"The burden of proving fundamental unfairness requires that the plaintiff establish (1) that the defendant was aware of the plaintiff's claim against the corporation, and (2) thereafter, the defendant acted in a self-serving manner with regard to the property of the corporation and in disregard of the plaintiff's claim in the property." Sturkie, 280 S.C. at 459, 313 S.E.2d at 319. A person is "aware" of a claim against the corporation "if he has notice of facts which, if pursued with due diligence, would lead to knowledge of the claim." Multimedia Publishing of S.C., Inc., 314 S.C. at 555, 431 S.E.2d at 572. "The essence of the fairness test is simply that an individual businessman cannot be allowed to hide from the normal consequences of carefree entrepreneuring by doing so through a corporate shell." Multimedia Publishing of S.C., Inc., 314 S.C. at 556, 431 S.E.2d at 573.
"Piercing the corporate veil" will not occur if the "fundamental unfairness" standard of the second prong can be avoided, which is what occurred in the Sturkie case. The appeals court in Sturkie affirmed the trial court based on the fact that the record was "totally devoid of any evidence from which we can determine that the respondents were aware of the claim presented by the receiver at the time they engaged in the acts relied on by the receiver to establish personal liability." 280 S.C. at 459, 313 S.E.2d at 319.
Hunting v. Elders
In Hunting, April 2, 1994, Catherine L. Hitchcock was injured in an accident caused by a drunk driver. In January 1995, Hitchcock's guardian ad litem brought suit against (1) Chris Gordon (Gordon) as the drunk driver, (2) Elmyer Enterprises, Inc. (Elmyer Enterprises) as the owner and operator of a bar named Willie's, and (3) William Elders (Elders) as the alter ego of the corporation. In the first phase of the trial, actual damages of $1.5 million were awarded against Gordon and Elmyer Enterprises in September 1997. The second phase of the trial resulted in a holding in June 2001 that Elders was the alter ego of Elmyer Enterprises, justifying piercing the corporate veil. Elders appealed, but the South Carolina Court of Appeals affirmed the trial court. 359 S.C. at 220-221, 597 S.E.2d at 805. The author's law firm was involved in the first phase of the trial of this case. This is an academic paper and the facts set forth above are taken from the order and opinions in the case. They are in no way representative of...