McLeskey v. Davis Boat Works Inc

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
KENNETH W. MCLESKEY,
Plaintiff-Appellant,
v.
DAVIS BOAT WORKS, INCORPORATED,
a/k/a Buddy Davis & Associates,
Incorporated; BUDDY DAVIS &
ASSOCIATES, INCORPORATED; CARSON
R. DAVIS, JR., a/k/a Buddy Davis;
BUDDY DAVIS ASSOCIATES YACHT
BROKERAGE, INCORPORATED; BARBARA No. 99-1113
S. DAVIS; MILL LANDING MARINE
MAINTENANCE CENTER,
INCORPORATED; THICKET LUMP
ENTERPRISES, INCORPORATED,
Defendants-Appellees,
and
C. R. DAVIS COMPANY; CAROLINA
YACHT INTERIORS, INCORPORATED,
Defendants.
Appeal from the United States District Court
for the Eastern District of North Carolina, at Elizabeth City.
Terrence W. Boyle, Chief District Judge.
(CA-98-16-2-BO)
Argued: April 4, 2000
Decided: July 21, 2000
Before NIEMEYER, MICHAEL, and KING, Circuit Judges.
_________________________________________________________________
Vacated and remanded by unpublished per curiam opinion.
_________________________________________________________________
COUNSEL
ARGUED: Walter DeKalb Kelley, Jr., WILLCOX & SAVAGE,
P.C., Norfolk, Virginia, for Appellant. Ashley Lee Hogewood, III,
KENNEDY, COVINGTON, LOBDELL & HICKMAN, L.L.P.,
Raleigh, North Carolina, for Appellees. ON BRIEF: Sara Wyche
Higgins, KENNEDY, COVINGTON, LOBDELL & HICKMAN,
L.L.P., Raleigh, North Carolina, for Appellees.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
PER CURIAM:
Kenneth McLeskey brought this action for unpaid wages against
Carson R. (Buddy) Davis, Barbara Davis, Buddy Davis Yacht Broker-
age, Inc. (Yacht Brokerage), and various other corporations wholly
owned by the Davises. The complaint alleged fraud, unfair trade prac-
tices, breach of contract, and violation of the North Carolina Wage
and Hour Act. In addition to the substantive counts, the complaint
sought to impose personal liability on the Davises as officers and
directors of a dissolved corporation, to pierce the corporate veil of
Yacht Brokerage, and to "reverse pierce"1 the veils of the other Davis-
owned corporations or entities. The district court awarded summary
_________________________________________________________________
1 Typically, piercing of the corporate veil renders a shareholder liable
for the obligations of the corporation. "Reverse piercing" applies when
the "assets of the corporate entity are used to satisfy the debts of a corpo-
rate insider so that the corporate entity and the individual will be consid-
ered one and the same." In re Blatstein, 192 F.3d 88, 100 (3d Cir. 1999)
(internal quotations omitted).
2
judgment to the defendants on all claims except McLeskey's breach
of contract claim against Yacht Brokerage. That claim went to trial
and McLeskey prevailed. McLeskey now appeals the district court's
grant of summary judgment to the Davises and the other corporate
defendants on three of his other claims -- the claims (1) to impose
personal liability on the Davises as officers and directors of a dis-
solved corporation, (2) to pierce the several corporate veils, and (3)
to recover under the Wage and Hour Act. For the reasons stated
below, we vacate the judgment as to these three claims and remand
for further proceedings.
I.
Defendants Buddy and Barbara Davis are the sole shareholders of
the seven defendant corporations, each of which is engaged in some
aspect of yacht construction, sales, and repair. All of these corpora-
tions operated out of a single facility using the trade name "Buddy
Davis & Associates." In August 1993 plaintiff Kenneth McLeskey
began working as a yacht salesman for Yacht Brokerage. Yacht Bro-
kerage was the exclusive broker for the Davises' yacht construction
business (Davis Boat Works, Inc.), and Yacht Brokerage received a
five percent commission on all new boat construction contracts.
Buddy Davis and McLeskey began discussing a new employment
contract in late 1993, and on January 1, 1994, McLeskey became
president of Yacht Brokerage. The new agreement entitled him to a
2.5 percent commission on all new boat contracts that he personally
generated plus a fifty percent share of any profits realized by Yacht
Brokerage. The Davises, who were both officers and directors of
Yacht Brokerage, told McLeskey that they had incorporated the com-
pany in the 1980s, that it had been "inactive" since 1987, and that the
Davises were in the process of filing for active status. McLeskey
alleges, however, that the Davises failed to tell him that Yacht Bro-
kerage had been administratively dissolved and placed under revenue
suspension in December 1993.
McLeskey was fired by Yacht Brokerage in December 1994, at
which time he claims he was owed $72,250 in commissions. Yacht
Brokerage conceded that he was owed $8,904.83 and offered to pay
that amount, subject to McLeskey agreeing to release all of his
3
remaining claims. McLeskey refused to settle and instead filed suit
against the Davises, Yacht Brokerage, Davis Boat Works, and the
various other corporate entities owned by the Davises. McLeskey's
complaint alleged breach of contract, fraud, violation of the North
Carolina Wage and Hour Act, and unfair trade practices. McLeskey
also sought (1) to impose individual officer and director liability upon
the Davises for acting through a dissolved corporation (Yacht Broker-
age) and (2) to pierce the corporate veils of the several Davis corpora-
tions named as defendants. The defendants were awarded summary
judgment on all claims except McLeskey's claim for breach of con-
tract against Yacht Brokerage. That claim went to trial and the jury
awarded McLeskey the full $72,250 that he claimed he was due.
Because Yacht Brokerage had insufficient funds to satisfy the judg-
ment, McLeskey appealed the district court's grant of summary judg-
ment for the Davises on the claim for personal liability as officers and
directors of a dissolved corporation, for all defendants on the veil
piercing claim, and for Yacht Brokerage on the claim for violation of
the North Carolina Wage and Hour Act.
II.
McLeskey claims that the Davises are personally liable, as officers
and directors of a dissolved corporation, for the contractual obliga-
tions of Yacht Brokerage. The district court concluded that McLeskey
was estopped from challenging Yacht Brokerage's corporate status
because McLeskey had "repeatedly acknowledged the corporate sta-
tus" of Yacht Brokerage during the period of his employment. On that
basis, the district court granted summary judgment to the Davises. We
hold that directors and officers of a suspended or dissolved corpora-
tion, who undertake obligations on behalf of that corporation, cannot
assert corporation by estoppel to avoid personal liability. We there-
fore vacate the summary judgment for the Davises.
Under North Carolina law, "directors and officers are personally
liable for corporate obligations incurred by them on behalf of the cor-
poration, or by others with their acquiescence, if at that time they
were aware that the corporate charter was suspended." Charles A.
Torrence Co. v. Clary, 464 S.E.2d 211, 213 (N.C. Ct. App. 1995). See
also Pierce Concrete, Inc. v. Cannon Realty & Constr. Co., 335
S.E.2d 30, 31 (N.C. Ct. App. 1985). There is no dispute that Yacht
4
Brokerage had been suspended and dissolved, that the Davises were
aware of the suspension and dissolution, and that the Davises were
officers and directors of the dissolved corporation. The Davises argue,
however, that McLeskey dealt with Yacht Brokerage as if it was a
corporation. As a result, the Davises contend, the doctrine of "corpo-
ration by estoppel" precludes McLeskey from denying Yacht Broker-
age's corporate status in order to impose personal liability on its
officers and directors.
We disagree. Corporation by estoppel applies when a party con-
tracts with an entity that appears to be a corporation, breaches the
contract, and then, when sued for breach, tries to avoid liability by
challenging the corporation's status and capacity to contract. See
Erskine Motors Co. v. Chevrolet Motor Co., 105 S.E. 420, 422 (N.C.
1920); Otis Elevator Co. v. Cape Fear Hotel Co. , 90 S.E. 253 (N.C.
1916); Bond Truck Service, Inc. v. Hill, 281 S.E.2d 61, 66 (N.C. Ct.
App. 1981); Wickes Corp. v. Hodge, 172 S.E.2d 890, 892 (N.C. Ct.
App. 1970). In such cases, a defendant who has dealt with an entity
as a corporation is estopped from later denying its existence. See Otis
Elevator Co., 90 S.E. at 253-54. The doctrine does not apply, how-
ever, when a person contracts with a suspended corporation, sues for
breach, and the defendant officers and directors seek to avoid per-
sonal liability by arguing that the plaintiff dealt with the suspended
entity as if it was a legitimate corporation. See Erskine Motors, 150
S.E. at 422 ("Neither a person nor an organization can escape liability
when it has contracted as a corporation . . . ."). It is enough to point
out that if we adopted the Davises' argument, we would gut the prin-
ciple that directors and officers are liable for obligations they incur on
behalf of a suspended corporation. Under the Davises' theory, so long
as contracting parties were unaware of the suspension, directors and
officers could avoid personal liability simply by misrepresenting or
concealing the status of the corporation. But "[t]he law will not permit
a corporate officer to create obligations in the name of the corpora-
tion, knowing the acts are without authority and invalid, and then be
permitted to use the corporate name as a shield against the creditors."
Pierce Concrete, 335 S.E.2d at 32.
We therefore hold that a plaintiff who has dealt with a suspended
corporation as if it was valid is not estopped from imposing personal
5
liability on officers or directors of the suspended corporation who
have undertaken obligations on its behalf.2
III.
We next address McLeskey's claim that the district court erred in
granting summary judgment on his claim that Yacht Brokerage's cor-
porate veil should be pierced and that the veils of the other Davis cor-
porations should be reverse-pierced. McLeskey alleges that the
Davises used the assets of Yacht Brokerage to pay the debts of other
entities that they owned, artificially deflating the profits of Yacht Bro-
kerage in order to make it appear as though the company made no
money in 1994 and thus owed him no bonus. We conclude that the
evidence in support of piercing the corporate veils was sufficient to
withstand summary judgment, and we therefore vacate the district
court's grant of summary judgment to the defendants on this claim.
North Carolina permits the veil to be pierced when a person or cor-
poration "exercises actual control over another[corporation], operat-
ing the latter as a mere instrumentality or tool." Glenn v. Wagner, 329
S.E.2d 326, 330 (N.C. 1985). To pierce the corporate veil, a plaintiff
must show "(1) stock control and domination of finances, policy, and
business practice with respect to the transaction attacked; (2) control
used by the defendant to commit fraud or wrong; and (3) proximate
cause." Id. at 331. Numerous factors may be relied upon to show con-
trol and domination. These include inadequate capitalization, non-
compliance with corporate formalities, complete domination and con-
trol, excessive fragmentation of a single enterprise into separate cor-
porations, siphoning of funds by a dominant shareholder, and absence
of corporate records. See id. at 332.
_________________________________________________________________
2 The Davises further argue that since McLeskey was president of
Yacht Brokerage and was aware that the corporation was on "inactive
status," he too is liable for the obligations of the corporation. McLeskey,
however, contests both of these assertions, arguing that he was president
in name only, see Gold v. Sloan, 486 F.2d 340, 351 (4th Cir. 1973)
(employee who was only a "titular" corporate officer and lacked the
actual responsibilities of such an officer could not be held liable for cor-
porate acts), and that he was unaware that Barbara Davis, as secretary,
had failed to reactivate Yacht Brokerage's corporate charter. This is a
factual dispute that cannot be resolved at the summary judgment stage.
6
McLeskey introduced evidence pertaining to most of these recog-
nized factors. Construed in the light most favorable to McLeskey, see
United States v. Leak, 123 F.3d 787, 794 (4th Cir. 1997), that evi-
dence showed (1) that the Davises failed to observe corporate formali-
ties in operating a dissolved corporation, (2) that the Davises were the
sole shareholders in Yacht Brokerage and all other defendant corpora-
tions and had sole authority to write checks on behalf of Yacht Bro-
kerage, (3) that the Davises operated several businesses out of a single
facility and under a single trade name, (4) that Yacht Brokerage's cor-
porate bank account was in the name of a different Davis-owned busi-
ness and was used by several other Davis-owned businesses, (5) that
the Davises used funds belonging to Yacht Brokerage and their other
businesses for personal expenses, (6) that numerous payments from
Yacht Brokerage to other Davis-owned entities were documented
either by illegible invoices or not at all, and (7) that the Davises
caused commissions owed to Yacht Brokerage to be diverted to Davis
Boat Works. Based on this evidence and the permissible inferences
that could be drawn from it, a reasonable juror could conclude that the
Davises disregarded corporate formalities, dominated and controlled
Yacht Brokerage, failed to maintain corporate records, and commin-
gled, diverted, and siphoned corporate funds. Thus, we hold that
McLeskey introduced sufficient evidence of the Davises' domination
or control of Yacht Brokerage to withstand a motion for summary
judgment.
The district court further held that McLeskey had failed to "present
grounds for disregarding the corporate form of the other corporate
defendants." The direct evidence of domination and control was cer-
tainly stronger with respect to Yacht Brokerage than to the other
Davis-owned businesses. Nonetheless, McLeskey produced evidence
of control, irregular recordkeeping, disregard of corporate formalities,
and commingling, diverting, and siphoning of funds with respect to
all of the Davises' businesses. This evidence, and the inferences that
could be drawn from it, were sufficient for a reasonable juror to find
that the Davises' corporations "functioned as a single business enter-
prise in substance, if not in form." Glenn , 329 S.E.2d at 333.
Finally, the defendants argue that McLeskey failed to allege a suf-
ficient nexus between the domination and control of Yacht Brokerage
and any fraud perpetrated by the defendants. McLeskey has alleged
7
that the Davises caused Yacht Brokerage to pay expenses attributable
to the corporate defendants while diverting Yacht Brokerage's reve-
nues to those other businesses. The result, according to McLeskey,
was that Yacht Brokerage's profits -- and his share of those profits
-- were understated. North Carolina courts will allow the corporate
veil to be pierced "whenever necessary to prevent fraud or to achieve
equity." Id. at 330. McLeskey's allegation that the Davises frustrated
his contract rights by redistributing the profits of Yacht Brokerage
among the various corporate defendants provides a sufficient nexus
between defendants' conduct and the alleged abuse of the corporate
privilege.
For the reasons stated above, we vacate the district court's grant of
summary judgment on all claims contingent on piercing the several
corporate veils.
IV.
McLeskey also claims that Yacht Brokerage violated the North
Carolina Wage and Hour Act, N.C. Gen. Stat. §§ 95-25.7A, 95-25.22,
when it conceded that it owed him $8,904.83, yet refused to pay
unless he released the balance of his claim for $72,250. Since
McLeskey only complained about the refusal to unconditionally pay
the undisputed amount, the district court sua sponte held that the
claim was mooted by Yacht Brokerage's offer to settle. The court
then granted summary judgment to all defendants.
The Wage and Hour Act claim was not moot. North Carolina Gen.
Stat. § 95-25.7A(a) states that "If the amount of wages is in dispute,
the employer shall pay the wages, or that part of the wages, which the
employer concedes to be due without condition , within the time set
by this Article." N.C. Gen. Stat. § 95-25.7A(a) (emphasis added). An
offer to pay undisputed wages, but only if the employee releases all
other claims, clearly is not payment "without condition," and it thus
fails to satisfy the requirements of the Act. It is of no consequence
that such a release, required by the employer as a condition of partial
payment, would be void. See id. § 95-25.7A(b). An illegal, in ter-
rorem condition is still a condition. We therefore vacate the district
8
court's entry of summary judgment for Yacht Brokerage on
McLeskey's claim under the Wage and Hour Act.3
V.
In sum, we vacate the district court's grant of summary judgment
to the Davises on the claim for personal liability as officers and direc-
tors of a dissolved corporation, to all defendants on the veil piercing
claim, and to Yacht Brokerage on the claim for violation of the North
Carolina Wage and Hour Act. The case is remanded for further pro-
ceedings.
VACATED AND REMANDED
_________________________________________________________________
3 We also note that the Wage and Hour Act provides for "liquidated
damages" in addition to the actual wages owed. See N.C. Gen. Stat. § 95-
25.22(a1); Hamilton v. Memorex Telex Corp., 454 S.E.2d 278, 285-86
(N.C. Ct. App. 1995). Thus, McLeskey's claim under the Wage and
Hour Act is not mooted by the fact that he has already prevailed on his
breach of contract claim.
9