Savco v. Century ( 1997 )

IN THE COURT OF APPEALS OF TENNESSEE
EASTERN SECTION AT KNOXVILLE FILED
May 13, 1997
SAVCO, INC., ) WASHINGTON CIRCUIT
Cecil Crowson, Jr.
) Appellate C ourt Clerk
Plaintiff/Appellee ) NO. 03A01-9611-CV-00360
)
v. ) HON. LEWIS W. MAY, JR.,
) JUDGE
CENTURY HOME IMPROVEMENT, )
INC. )
)
Defendant )
and )
)
MARVIN GRIFFITH, )
) AFFIRMED
Defendant/Appellant )
Edward T. Brading, Johnson City, for Appellant, Marvin Griffith.
Walter Lee Davis, Jr., Johnson City, for Appellee, Savco.
OPINION
INMAN, Senior Judge
This is a suit on open account. The plaintiff corporation sold a quantity of building
materials to the defendant corporation which acknowledges the debt; but its sole
shareholder, Marvin Griffith, was also held liable for the account and he appeals.
To reach the shareholder it was necessary to 'pierce the corporate veil' and
whether the evidence was sufficient to ignore the Charter of the debtor corporation is
the issue presented.
Our review is de novo on the record, accompanied by a presumption that the
findings of fact of the trial court are correct unless the evidence otherwise
preponderates. RULE 13(d), TENN. R. APP. P. There is no presumption of correctness
with regard to the trial court's determination of questions of law. NCNB v. Thrailkill, 856
S.W.2d 250, 153 (Tenn. App. 1993).
The plaintiff, now defunct, was engaged in the business of wholesaling vinyl
siding, windows and shutters. The appellant owned 40% of its outstanding shares, and
was also its full-time employee.
In early 1994 the plaintiff began doing business with Century Home Improvement,
Inc., whose shares were wholly owned by Charles T. Bowers.
Mr. Bowers, on behalf of Century, obtained, in March, 1994, a $5,000.00 line of
credit from the plaintiff.
In July, 1994, Mr. Griffith acquired all of the outstanding shares of Century from
Mr. Bowers, for which he apparently paid nothing. He testified, somewhat
inconsistently, that "I've put money into it for capital," and "the only thing I've ever done
is loan the company money." As sole shareholder and President of Century he
exercised complete control of the corporation.
The trial court described Century as a "sham corporation . . . set up for the
purpose of doing that which, while not illegal, was certainly unethical in the business
they were operating," apparently in reference to the fact that a minority shareholder of
the wholesaler acquired the retailer of comparable goods. Whatever the business ethics
of this acquisition may have been, the evidence does not reflect; but we note, in passing
through, that the majority shareholders of Savco not only offered no objection to the
acquisition, but expressly approved it. As may be deduced from this record, the
appellee defends the judgment upon the basis that Griffith (1) controlled Century
especially in the area of paying bills, (2) used corporate funds and employees for his
personal benefit, (3) transacted business through Century which did not have sufficient
operating capital, (4) had a personal relationship with the majority shareholders of Savco
which he misused to incur debt on behalf of Century.
As to (1), there is little or no doubt that Mr. Griffith exercised absolute control of
Century, superimposed upon his substantial influence with Savco. As to (2), the
evidence consists of testimony that he utilized the services of a Century secretary to
compile information for him about another lawsuit in which he was a party and that
Century made payments on his boat. As to (3), the evidence reveals that Mr. Griffith
"paid no capital into the corporation" which usually had only one or two thousand dollars
in its checking account. As to (4), one of the majority shareholders of Savco testified:
Q: But it's also your testimony that Mr. Griffith, I suppose, hoodwinked
Savco into letting Century go over the $5,000. in May of 1995. Is
that also your testimony?
A: I would not consider it hoodwinked. I would consider it using his
relationship with Savco and our personal friendship to increase the credit
amount.
2
The record does not reveal whether Mr. Griffith was a director of either
corporation, and neither party raises the issue of his fiduciary duty, or consequently, of
any breach thereof. The appellee merely argues that in light of the circumstances the
trial judge correctly held that the Charter of Century should be ignored.
The controlling principles of law are set forth in Electric Power Bd. of
Chattanooga v. St. Joseph Valley Structural Steel Corp., 691 S.W.2d 522 (Tenn. 1985):
A corporation, of course, has an existence separate and distinct
from that of the owners of its capital stock, but this separate entity may be
disregarded upon the showing of special circumstances, such as, that the
corporation is a sham or dummy so that failure to disregard it would result
in an injustice. Fidelity Trust Co. v. Service Laundry Co., 22 S.W.2d 6(1929); American Indemnity Co. v. Southern Missionary Col., 260 S.W.2d
269, (1953); Tennessee Consol. Coal Co. v. Home Ice & Coal Co., 386
S.W.2d 918 (1964).
In our most recent case discussing the circumstances which will
cause a court to disregard the separate entity of a subsidiary corporation
and fix its liability on the parent corporation, we said:
" . . . application of the instrumentality rule requires proof of the following
three elements:
"(1) The parent corporation, at the time of the transaction complained of,
exercises complete dominion over its subsidiary, not only of finances, but
of policy and business practice in respect to the transaction under attack,
so that the corporate entity, as to that transaction, had no separate mind,
will or existence of its own.
"(2) Such control must have been used to commit fraud or wrong, to
perpetrate the violation of a statutory or other positive legal duty, or a
dishonest and unjust act in contravention of third parties' rights.
"(3) The aforesaid control and breach of duty must proximately cause the
injury or unjust loss complained of." Continental Bankers Life, Etc. v.
Bank of Alamo, 578 S.W.2d 625, 632 (1979).
See also, 7 Tennessee Jurisprudence 235-236, Corporations, sect. 3
(1983); 18 Am. Jur.2d, Corporations, sect. 17 (1965); 63 Am. Jur2d.
Products Liability, sect. 166 (1984).
The conditions under which the corporate entity will be disregarded
vary according to the circumstances present in each case and the matter
is particularly within the province of the trial court. Moreover, a
determination of whether or not a corporation is a mere instrumentality of
an individual or a parent corporation is ordinarily a question of fact for the
jury. Trans-American Communications, Inc. v. Nolle, 134 Ga. App. 457,
214 S.E.2d 717 (1975); Alexander v. Abbey of The Chimes, 104 Cal. App.
3d 39, 163 Cal. Rptr. 377 (1980).
We particularly take note of the admonition that "a determination of whether or
not a corporation is a mere instrumentality of an individual . . . is ordinarily a question
of fact for the jury," here, the trial judge. Applying this standard, we cannot find that the
evidence preponderates against the findings of the trial judge.
3
Mr. Griffith was an employee of Savco; he owned 40% of its shares; he was
persuasive in the conduct of its wholesaling business. He acquired 100% of the stock
of Century, a retail customer of Savco, for which he paid nothing. Century continued to
do business with Savco, surpassing its established credit line ten-fold. For all practical
purposes Mr. Griffith sold Savco's inventory to himself without the onus of payment.
Century doubtlessly was his instrumentality.
While there is no evidence that Century was "set up" to perpetuate a course of
dealing, since it pre-existed Mr. Griffith's ownership, we are unable to find that the
evidence preponderates against the finding of the Chancellor that the Charter of Century
should be ignored under the circumstances of this case.
The Judgment is affirmed at the costs of the appellant.
__________________________________
William H. Inman, Senior Judge
CONCUR:
_______________________________
Houston M. Goddard, Presiding Judge
_______________________________
Charles D. Susano, Jr., Judge
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