David Canter v. Richard Ebersole

IN THE COURT OF APPEALS OF TENNESSEE
AT KNOXVILLE
April 5, 2006 Session
DAVID CANTER v. RICHARD EBERSOLE
Direct Appeal from the Chancery Court for Hamilton County
No. 04-0585 Hon. W. Frank Brown, III., Chancellor
No. E2005-02388-COA-R3-CV - FILED MAY 13, 2006
Plaintiff brought an action in the Chancery Court to pierce the corporate veil to reach assets of a
member to satisfy a judgment against the corporation. The Chancellor refused the request and
dismissed the action. On appeal, we affirm.
Tenn. R. App. P.3 Appeal as of Right; Judgment of the Chancery Court Affirmed.
HERSCHEL PICKENS FRANKS, P.J., delivered the opinion of the court, in which D. MICHAEL SWINEY ,
J., and SHARON G. LEE, J., joined.
Michael A. Anderson, Chattanooga, Tennessee, for appellant.
John P. Konvalinka, Chattanooga, Tennessee, for appellee.
OPINION
In this action the plaintiff asked the Chancellor to pierce the corporate veil of
Windward Pointe Townhomes, LLC (“WPT”).
Richard Ebersole and Dale Mabee organized WPT on July 17, 1998 for the purpose
of constructing and selling eight town homes near Lake Chickamauga in the Chattanooga area.1
Ebersole became the sole member after Mabee withdrew from WPT in April 2001. WPT had an
initial capitalization of $1,000.00, and First Tennessee Bank provided over three million dollars in
1
WPT was organized pursuant to Tenn. Code Ann. §§ 48-203-101, 48-205-101.
financing pursuant to a loan, which Ebersole personally guaranteed.2
On November 2, 1998, WPT entered into a sales contract with the plaintiff for the
purchase of one of the town homes. According to Ebersole, the agreed purchase price was
$525,000.00, and pursuant to the contact, Canter paid a $25,000.00 deposit for the town home and
installed heat and air units in all eight town homes via his company, Retail Air Systems, LLC
(“Retail Air”). In exchange for the installation of the heat and air units, Canter was to receive a
credit of $42,515.79 against the purchase price at closing. At some point in 2002, plaintiff informed
WPT that he did not intend to close the sale. In December 2002, WPT sold this town home to
another buyer for less than the original contract price, and filed suit against Retail Air and plaintiff
for the breach of the contract, and Retail Air and plaintiff filed a counter-claim for the same.3 On
September 25, 2003, the Chancery Court entered a judgment dismissing WPT’s complaint and
awarding Canter $67,515.79 against WPT.4
Plaintiff’s Complaint averred that WPT failed and refused to pay the judgment and
that Ebersole exercised his personal dominion and control over WPT to defraud plaintiff. The
Complaint argued that Ebersole should be held personally liable to pay the judgment, post-judgment
interest, and costs. After trial, the Chancellor ruled that the evidence did not support piercing the
corporate veil, and dismissed the Complaint with prejudice.5
This case is subject to de novo review based upon the record of the proceedings
below. Keaton v. Hancock County Bd. of Educ., 119 S.W.3d 218, 222 (Tenn. Ct. App. 2003). We
will presume that the trial court’s findings of fact are correct, unless the evidence preponderates to
the contrary. Tenn. R. App. P. 13(d); Union Carbide Corp. v. Huddleston, 854 S.W.2d 87, 91 (Tenn.
2
WPT defaulted on this loan in the summer of 2002, and Ebersole used his personal funds
to make payments directly to First Tennessee Bank pursuant to the guaranty.
3
WPT did not have sufficient funds to pay for legal fees; thus, Mr Ebersole paid the legal fees
personally. Prior to this litigation, the Secretary of State administratively dissolved WPT for failure
to file its annual report for 2000. This administrative dissolution occurred on March 16, 2001. The
Secretary of State reinstated WPT on February 25, 2004.
4
The Chancery Court reasoned that WPT breached the contract first by delaying completion
of Mr. Canter’s town home until June 2001.
5
Neither shareholders of a corporation nor members of a limited liability company are
personally liable for the acts or debts of the entity. Tenn. Code Ann. §§ 48-16-203(b), 48-217-
101(a)(1) (2005). In addition, both corporations and limited liability companies are empowered “as
an individual to do all things necessary or convenient to carry out its business.” Tenn. Code Ann.
§§ 48-13-102, 48-212-101 (2005). In addition, this Court has affirmed application of veil piercing
to disregard the existence of an LLC. Chopra v. U.S. Prof’ls, LLC., No. CT-004949-00, 2005 WL
280346, at *4 (Tenn. Ct. App. Feb. 2, 2005).
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1993). This presumption of correctness, however, does not apply to the trial court’s conclusions of
law. Keaton, 119 S.W.3d at 222.
The piercing of a corporate veil is applied in extreme circumstances, and no single
factor may form a basis for piercing the corporate veil. Piercing the corporate veil is an equitable
doctrine to prevent the use of a corporate entity to defraud or perform illegal acts. See, Schlater v.
Haynie, 833 S.W.2d 919, 925 (Tenn. Ct. App. 1991); Oak Ridge Auto Repair Service v. City Finance
Co., 425 S.W.2d 620, 622 (Tenn. Ct. App. 1967); Muroll Gesellschaft M.B.H. v. Tenn. Tape, Inc.,
908 S.W.2d 211, 213 (Tenn. Ct. App. 1995). The legal entity should not be disregarded
precipitately, but with great caution. Schlater, 833 S.W.2d at 925.
“The determination of whether to disregard the corporate fiction depends on the
special circumstances of each case, and ‘the matter is particularly within the province of the trial
court.’” Oceanics Schools, Inc. v. Barbour, 112 S.W.3d 135, 140 (Tenn. Ct. App. 2003) (quoting
Electric Power Bd. of Chattanooga v. St. Joseph Valley Structural Steel Corp., 691 S.W.2d 522, 256
(Tenn. 1985)).
“Factors to be considered in determining whether to disregard the corporate veil
include not only whether the entity has been used to work a fraud or injustice in
contravention of public policy, but also: (1) whether there was a failure to collect
paid in capital; (2) whether the corporation was grossly undercapitalized; (3) the
nonissuance of stock certificates; (4) the sole ownership of stock by one individual;
(5) the use of the same office or business location; (6) the employment of the same
employees or attorneys; (7) the use of the corporation as an instrumentality or
business conduit for an individual or another corporation; (8) the diversion of
corporate assets by or to a stockholder or other entity to the detriment of creditors,
or the manipulation of assets and liabilities in another; (9) the use of the corporation
as a subterfuge in illegal transactions; (10) the formation and use of the corporation
to transfer to it the existing liability of another person or entity; and (11) the failure
to maintain arms length relationships among related entities.”
Id. (quoting Federal Deposit Ins. Corp. v. Allen, 584 F. Supp. 386, 397 (E.D. Tenn.1984)). The party
requesting that the corporate entity be disregarded has the burden of presenting facts demonstrating
the need for such relief. Id. No one factor is conclusive. Id.
Plaintiff argues there are several factors to justify disregarding the separate existence
of WPT. He cites the fact that the Secretary of State administratively dissolved WPT prior to the
entity’s suit against Canter, and reinstatement was not made until after plaintiff was awarded the
judgment at issue in this case. At trial, Ebersole testified he intended to dissolve WPT after this
litigation is concluded. These facts are irrelevant, however, because an LLC member’s right to
limited liability “continues in full force regardless of any dissolution, winding up, and termination
of an LLC.” Tenn. Code Ann. § 48-217-101(b) (2005).
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Plaintiff also stresses that Ebersole failed to follow usual company formalities. For
example, Ebersole contended that by informally discussing business with his former partner, Mabee,
any requirements for formal meetings and resolutions were satisfied. On March 16, 2001, the
Secretary of State administratively dissolved WPT for failure to file its annual report for 2000. In
addition, WPT received numerous loans from Ebersole and other entities controlled by Ebersole.
There were no formal promissory notes documenting these interest free loans, only notations in the
entities’ accounting records. These facts are also irrelevant because an LLC’s failure to follow usual
company formalities “is not a ground for imposing personal liability on the members . . . of the
LLC.” Tenn. Code Ann. § 48-217-101(e) (2005).
Plaintiff asserts that WPT was grossly undercapitalized, as the initial capitalization
was only $1,000.00 for a multi-million dollar project. Soon after its formation, WPT received $3.2
million in financing from First Tennessee Bank, and Ebersole personally guaranteed this loan. WPT
also received one million dollars in additional loans from Ebersole and entities owned by him. The
Chancellor rejected this argument thusly:
Mr. Ebersole testified that the initial capital of WPT was $1,000.00.
However, he and Mr. Mabee and companies they controlled made loans to WPT as
needed. Most important, the members had estimated the costs of the project and
agreed to borrow sufficient funds from First Tennessee Bank to build the townhomes.
Unfortunately for Mr. Ebersole, there was an increase in costs and expenses and two
townhomes did not sell as expected. The anticipated profit did not occur.
Mr. Canter points to Mr. Ebersole’s personal payment of some of WPT’s
debts. Therefore, Mr. Canter argues that Mr. Ebersole should be liable for all debts
of WPT. Mr. Ebersole testified, without contradiction, that he only paid those
obligations of WPT for which he also was personally liable. For example, he
executed a personal guarantee to First Tennessee Bank. He had paid some of his
personal monies to First Tennessee Bank when WPT did not have the funds to make
payment. His alternatives were to loan funds to WPT, so WPT could make the
payment, or let the bank sue him. His direct payment to the bank was reasonable and
permissible. This case is an example why creditors want a personal guarantee and/or
adequate security for a loan.
Plaintiff also argued that Ebersole dominated WPT. After the withdrawal of Mabee,
Ebersole had sole ownership and control of WPT, and had exclusive authority to write checks on
WPT’s account and to borrow funds on its behalf. He operated WPT from his home and used his
personal cell phone for WPT business. While these facts indicate dominance, the evidence does not
establish that Ebersole used his dominance to defraud or conduct an illegal operation.
Finally, Canter argues Ebersole’s management of WPT’s debts is another factor
weighing in favor of veil piercing the corporate veil, and points to the repayment of debts to creditors
other than Canter. The Chancellor concluded that Ebersole’s payment of debts by the corporation,
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where Ebersole was personally liable did not establish an ulterior motive to defraud creditors,
especially as to debts that Ebersole personally guaranteed. Canter also points to the fact that WPT
used its last $20,000.00 in assets to partially repay its debts to Ebersole. The record shows that
Ebersole loaned WPT $369,556.99 and received total reimbursements of $146,697.07. The
Chancellor, in refusing to pierce the corporate veil said:
. . . Mr. Ebersole treated the entities as separate from himself. He documented loans
to the LLCs and kept records of the transactions of the companies. Nothing in the
record indicates that Mr. Ebersole used the LLCs to accomplish any unlawful acts.
In addition, there is nothing in the record that indicates that Mr. Ebersole diverted any
assets of WPT to prevent Mr. Canter from collecting the judgment. In sum, Mr.
Canter has given the court no reason to find that the equitable relief of piercing the
LLC veil is proper in this case. There was no injustice or wrongdoing shown which
would require personal liability on Mr. Ebersole’s behalf. Unfortunately, not every
person gets paid for his goods and/or services.
The evidence does not preponderate against the Trial Court’s findings of fact. Tenn.
R. App. P. 13(d). We affirm the Judgment of the Trial Court and remand, with the cost of the appeal
assessed to David Canter.
______________________________
HERSCHEL PICKENS FRANKS, P.J.
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