Carlene Guye Judd v. Carlton Guye

07/17/2018
IN THE COURT OF APPEALS OF TENNESSEE
AT NASHVILLE
June 6, 2018 Session
CARLENE GUYE JUDD V. CARLTON GUYE
Appeal from the Chancery Court for Davison County
No. 16-0277-II William E. Young, Chancellor
No. M2017-01791-COA-R3-CV
Plaintiff, a shareholder in the corporation at issue who obtained a judgment against the
corporation in a prior action, now seeks to pierce the corporate veil to hold the other
shareholder personally liable for the balance owing on the judgment. The trial court
summarily pierced the corporate veil and held the defendant shareholder personally liable
for the corporation’s debt to Plaintiff. The defendant shareholder appeals arguing, inter
alia, that the trial court erred in allowing Plaintiff to pierce the veil of her own
corporation. We affirm.
Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Affirmed
FRANK G. CLEMENT JR., P.J., M.S., delivered the opinion of the Court, in which ANDY D.
BENNETT and JOHN W. MCCLARTY, JJ., joined.
Dan E. Huffstutter, Nashville, Tennessee, for the appellant, Carlton Guye.
Jay S. Bowen and Lauren Kilgore, Nashville, Tennessee, for the appellee, Carlene Guye
Judd.
OPINION
This is the second action involving Carlene Guye Judd (“Plaintiff”) and Carlton
Guye (“Defendant”), who are siblings and were equal shareholders of West Meade
Decorating Company, Inc. (“WMDC”). In a previous action among the same parties,
Carlene Guye Judd, individually and in the right of West Meade Decorating Company,
Inc. v. Carlton Guye and West Meade Decorating Company, Inc., Case No. 13-0161-II,
Plaintiff sued Defendant and WMDC, in her individual capacity, and derivatively, as a
shareholder. Plaintiff asserted claims for judicial dissolution of WMDC, an accounting,
the appointment of a receiver to wind up the business, and a shareholder derivative action
on behalf of the company to recover funds misappropriated by Defendant for his personal
use, and assets he wrongfully converted.
On February 7, 2013, following a two day trial, the Davidson County Chancery
Court made extensive findings of fact and ruled, inter alia, that Defendant had abused the
corporate structure for his personal benefit and to the detriment of Plaintiff and the
company. The court awarded Plaintiff, in her individual capacity, a judgment against
WMDC in the amount of $266,246.70. The court also awarded Plaintiff, in her derivative
capacity for the benefit of WMDC, a judgment against Defendant for $239,102.79. The
judgment of the chancery court in the prior action was affirmed in Judd v. Guye, No.
M2015-00094-COA-R3-CV, 2015 WL 9311847, at *1 (Tenn. Ct. App. Dec. 21, 2015),
and is now res judicata.
Defendant satisfied the judgment he owed to WMDC; however, WMDC was only
able to satisfy a portion of the judgment owed to Plaintiff, leaving an outstanding balance
of $161,147.56. Because WMDC failed to completely satisfy the judgment, Plaintiff
commenced this action to pierce the corporate veil of WMDC in order to hold Defendant
personally liable for the remaining balance.
In this case, Plaintiff filed a motion for summary judgment relying almost
exclusively on the Chancellor’s factual findings in the previous action. Defendant
opposed the motion arguing that Plaintiff’s claims constituted “reverse piercing” of the
corporate veil, which remedy is generally unavailable in Tennessee.1 The Chancellor
found that the claim at issue was not one of reverse veil piercing, but instead it was more
akin to when one shareholder, who is a creditor of the corporation, is seeking to hold
another shareholder liable by piercing the corporate veil. The Chancellor also concluded
that a shareholder may pierce the corporate veil of the shareholder’s own corporation
when the dominant or controlling shareholder disregards the corporate form and thereby
harms the other shareholder. Accordingly, and by relying on the findings of fact from the
prior action, the Chancellor granted summary judgment to Plaintiff. This appeal followed.
1
“Reverse piercing” is when a creditor seeks to hold the corporation accountable for the actions
of its shareholders. See Mfrs. Consolidation Serv., Inc. v. Rodell, 42 S.W.3d 846, 866 (Tenn. Ct. App.
2000) (quoting American Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir.1997)).
“While the Tennessee Supreme Court has recognized the concept of reverse piercing, it did so in
the context of a parent/subsidiary relationship, as opposed to the corporation/shareholder, or
trust/beneficiary relationship.” Nadler v. Mountain Valley Chapel Bus. Tr., No. E2003-00848-COA-R3-
CV, 2004 WL 1488544, at *4 (Tenn. Ct. App. June 30, 2004) (citing Cont’l Bankers Life Ins. Co. of the
South v. Bank of Alamo, 578 S.W.2d 625, 632-33 (Tenn.1979)). “While this court has addressed the issue
of reverse piercing in the corporation/shareholder context, we have never adopted it.” Id. (citations
omitted).
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ISSUES
Defendant presents two issues for us to consider, which read as follows:2
1. Whether Tennessee recognizes an insider reverse pierce of the corporate veil as an
enforceable remedy in Tennessee?
2. Whether the circumstances of this Lawsuit justify [Plaintiff] utilizing the insider
reverse pierce of the corporate veil mechanism to pierce the corporate veil of
WMDC?
For her part, Plaintiff contends this is a frivolous appeal for which she is entitled to
recover her attorney’s fees on appeal.
STANDARD OF REVIEW
This court reviews a trial court’s decision on a motion for summary judgment de
novo without a presumption of correctness. Rye v. Women’s Care Ctr. of Memphis,
MPLLC, 477 S.W.3d 235, 250 (Tenn. 2015) (citing Bain v. Wells, 936 S.W.2d 618, 622
(Tenn. 1997)). Accordingly, this court must make a fresh determination of whether the
requirements of Tenn. R. Civ. P. 56 have been satisfied. Id.; Hunter v. Brown, 955
S.W.2d 49, 50-51 (Tenn. 1997). In so doing, we consider the evidence in the light most
favorable to the non-moving party and draw all reasonable inferences in that party’s
favor. Godfrey v. Ruiz, 90 S.W.3d 692, 695 (Tenn. 2002).
Summary judgment should be granted when “the pleadings, depositions, answers
to interrogatories, and admissions on file, together with the affidavits, if any, show that
there is no genuine issue as to any material fact and that the moving party is entitled to a
judgment as a matter of law.” Tenn. R. Civ. P. 56.04.
When a motion for summary judgment is made and supported, as provided in
Tenn. R. Civ. P. 56, the nonmoving party may not rest on the allegations or denials in its
pleadings. Id. Instead, the nonmoving party must respond with specific facts showing that
there is a genuine issue for trial. Id. A fact is material “if it must be decided in order to
2
Without identifying it as an “issue” under his Statement of the Issues, as Tenn. R. of App. P.
27(a)(4) requires, Defendant contends in the Argument section of his brief that awarding Plaintiff
damages after he satisfied his judgment to WDMC constitutes punitive damages. Because he failed to
identify this as an Issue as our rules require, the issue has been waived. See Cartwright v. Jackson Capital
Partners, L.P., 478 S.W.3d 596, 615-16 (Tenn. Ct. App. 2015) (quoting Flowers v. Bd. of Professional
Responsibility, 314 S.W.3d 882, 899 n.35 (Tenn. 2010). Moreover, Defendant cites no legal authority in
support of this argument, which also constitutes a waiver. See Tenn. R. of App. P. 27(a)(7); Bean v. Bean,
40 S.W.3d 52, 55 (Tenn. Ct. App. 2000).
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resolve the substantive claim or defense at which the motion is directed.” Byrd v. Hall,
847 S.W.2d 208, 215 (Tenn. 1993). A “genuine issue” exists if “a reasonable jury could
legitimately resolve that fact in favor of one side or the other.” Id.
ANALYSIS
I. PIERCING THE CORPORATE VEIL
The two issues raised by Defendant contend that the trial court erred by
recognizing and utilizing the so-called reverse veil piercing remedy to hold Defendant
personally liable for WMDC’s obligations to Plaintiff.
We begin our analysis by noting that the ruling by the trial court did not constitute
reverse veil piercing. The key distinctions between a traditional corporate veil piercing
and reverse veil piercing are explained in Reagan v. Connelly, No. E2000-00451-COA-
R3-CV, 2000 WL 1661524, at *6 (Tenn. Ct. App. Nov. 6, 2000):
There are two distinct classes of cases involving the disregarding of the
corporate identity. Most commonly, a corporation’s veil is pierced for the
benefit of creditors of the corporation, allowing them to proceed against the
individuals who are the “true owners of the entity.” The second class of
piercing cases involves what is often referred to as “reverse piercing.” In
Manufacturers Consolidation Service, Inc. v. Rodell, . . . we explained the
distinction between the more common piercing cases and the less common
reverse-piercing cases as follows:
“[W]hereas piercing analysis typically ‘is used to hold individuals liable for
the actions of a corporation they control,’ reverse piercing ‘seeks to hold a
corporation accountable for actions of its shareholders.’”
(internal citations omitted).
When WMDC was unable to satisfy the judgment it owed Plaintiff from the prior
action, Plaintiff initiated this action to pierce the veil of WMDC to hold Defendant
personally liable. As explained above, this action constitutes a traditional veil piercing, as
distinguished from a reverse piercing action in which a plaintiff is seeking to hold the
corporation liable for obligations of a shareholder. Therefore, Defendant’s reverse
piercing argument is unavailing.
Here, the trial court held, as a matter of first impression in Tennessee, that a
shareholder may pierce the corporate veil of the corporation to hold another shareholder
personally liable when (1) the plaintiff shareholder has a personal judgment against the
corporation and (2) the other shareholder acted as a dominant or controlling shareholder
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to the detriment of the corporation or its shareholders. In reaching its conclusion, the trial
court relied upon two cases from other jurisdictions. The trial court relied on the Missouri
Court of Appeals holding in Hibbs v. Berger, 430 S.W.3d 296, 309 (Miss. Ct. App.
2014), which states:
[E]quity requires a court to determine the applicability of piercing the
corporate veil upon the particular facts of each case. See 2 Close Corp and
LLCs: Law and Practice § 8:18 (Rev.3d ed.). Therefore, because piercing
the corporate veil is one of equity, we, too, oppose and reject the trial
court’s conclusion that, per se, minority shareholders may not pierce their
own corporate veil. Rather, we agree with the Schattner court and hold that
under “appropriate circumstances” a minority shareholder may attempt to
pierce the corporate veil and impose the corporate obligation upon another
shareholder. Schattner, 668 F.2d at 1371. After all, if majority shareholders
desire to be protected via the equitable doctrine of corporate veil piercing,
then we should also require majority shareholders to operate under the
same equitable principles by which they seek protection.
The trial court turned next to the New Jersey Superior Court in the case of Walensky v.
Jonathan Royce Int’l Inc., 624 A.2d 613 (N.J. Super. 1993), which dealt with the issue of
a closely held corporation in which minority shareholders were defrauded due to the
principal’s disregard of corporate formalities. The Walensky court observed that
[i]f a controlling stockholder uses a closed corporation as his personal
business conduit, he may be held responsible for the debts of his “alter
ego,” particularly when substantial stock ownership, combined with other
factors, clearly supports a disregard of the corporate fiction on grounds of
fundamental equity and fairness.
Walensky, 624 A.2d at 617. (citing 18 C.J.S. Corporations § 14 at 283-84 (1990)
(footnotes omitted)).
The situation in this case, however, does not deal with a majority or controlling
shareholder; rather, it involves two shareholders who own equal shares in the company.
Here, the trial court “acknowledge[d] that these cases discuss corporate veil piercing in
the context of minority shareholders, but the Court finds that here, where there is a
dominant shareholder versus a shareholder who suffered as a result of that dominant
shareholder’s actions, the same reasoning and analysis applies. . . .”
“A corporation is presumptively treated as a distinct entity, separate from its
shareholders, officers, and directors.” Oceanics Sch., Inc. v. Barbour, 112 S.W.3d 135,
140 (Tenn. Ct. App. 2003). However, in certain circumstances, “the corporate veil may
be pierced and the acts of a corporation attributed to a shareholder.” Rogers v. Louisville
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Land Co., 367 S.W.3d 196, 214 (Tenn. 2012). “Piercing the corporate veil is an equitable
doctrine to prevent the use of a corporate entity to defraud or perform illegal acts.” Nepp
v. Hart, No. M2005-2024-COA-R3-CV, 2006 WL 2582503, at *7 (Tenn. Ct. App. Sept.
7, 2006). Therefore, the courts will generally disregard the corporate structure “where it
is used as a cloak or cover for fraud or illegality, to work an injustice, to defend crime, or
to defeat an overriding public policy, or where necessary to achieve equity.” Rogers, 367
S.W.3d at 214-15 (quoting 18 Am. Jur. 2d Corporations § 57 (2004) (footnotes omitted)).
In order to pierce the corporate veil, the party seeking to pierce has the burden of
presenting proof that shows the “corporate entity is a sham or a dummy or that
disregarding the separate corporate entity is necessary to accomplish justice.” Id. at 215
(internal citations and quotations omitted). When determining whether to disregard the
corporate structure, the court is to look at the specific circumstances of the case. Id.
Furthermore, the “[f]actors 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” includes the following:
(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. (citing CAO Holdings Inc. v. Trost, 333 S.W.3d 73, 88 n. 13 (Tenn. 2010); FDIC v.
Allen, 584 F. Supp. 386, 397 (E.D. Tenn. 1984)). In evaluating these factors, no single
factor is conclusive, nor must all factors favor piercing the corporate veil; rather, a court
will typically rely on a combination of the factors. Id. “However, in all events, the
equities must ‘substantially favor’ the party requesting relief . . . and the presumption of
the corporation’s separate identity should be set aside only ‘with great caution and not
precipitately.’” Id. (internal citations omitted).
Here, the trial court found that the Chancellor’s findings in the previous action
justify piercing the corporate veil and having reviewed the relevant factors along with the
factual findings from the previous action, we agree. As the following findings by the
Chancellor in the previous action reveal, Defendant disregarded the corporate structure
for his own benefit and to the detriment of Plaintiff:
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Beginning in 2007-2008, at the time of the nationwide recession, the
business of [WMDC] dropped off dramatically. The construction industry
was negatively affected by the national economy, and, as a result, [WMDC]
was not as profitable as it had been in prior years. Around this same time,
[Mrs.] Judd noticed that her brother, Mr. Guye, was using the financial
resources of [WMDC] for his own personal benefit. Mr. Guye has lived
rent-free in an upstairs apartment in [WMDC] offices. The apartment was
initially fitted out for other uses; however, after a bad experience, Mrs.
Judd and Mr. Guye agreed that no one but family would use the upstairs
premises. Mr. Guye converted the upstairs portion of that real estate into an
apartment primarily used by him and his family as a resident during the
week.
Not only does Mr. Guye live rent free in the apartment above the business
operations of [WMDC’s] building, but [WMDC] also pays for all of the
utilities in the apartment. In addition, Mr. Guye used [WMDC] funds to pay
for all of his insurance on his four personal vehicles which are insured,
including a Mercedes Benz for his wife and a BMW for himself, for his
family’s cell phones and for his family’s monthly cell phone bills. Mr.
Guye also used [WMDC] funds to pay for his personal gasoline expenses,
including gas used during vacations and personal trips, and for expenses
incurred on those vacations and trips such as for hotels, lodging, food, and
recreation.
Mr. Guye acknowledges that he used [WMDC] funds for his personal
expenses. To the extent that he kept or maintained any receipts of those
expenses, he did not provide them to Mrs. Judd to provide to the CPA so
that those expenses could be attributed to Mr. Guye as personal income for
tax purposes or for any other reason. Furthermore, Mr. Guye has stated that
he did not intend to account for his use of these funds by providing those
receipts, which were requested in discovery, and did not have any desire to
provide them to Mrs. Judd. Mr. Guye has sold Company equipment,
particularly one tractor, in which he says that he applied the sale price to the
outstanding obligation on the Promissory Note owed to his Parents, thus,
using a corporate asset to reduce personal liability. Mr. Guye also used
[WMDC] work in exchange for a reduction in his other personal debts,
including a debt to his mother-in-law.
Mr. Guye has used company credit cards to pay for meals, both for his
family and himself, to pay for vacation and travel expenses for personal
trips, for the care of his pets, for groceries for himself and his family, for
expenses related to his fishing and boating hobby, and incurred numerous
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miscellaneous charges for his family and himself. The total for those
expenses incurred by Mr. Guye is $239,102.79. This amount includes the
credit card charges the he has incurred in the corporate name at First
Tennessee . . . in 2014, in the amount of $13,128.16; this amount also
includes the American Express charges incurred in 2014 in the amount of
$5,288.26, again, in the [WMDC’s] name. It also includes [a separate] First
Tennessee account . . . in the amount of $7,211.39 for 2013-2014.
Mrs. Judd, upon assuming responsibility for payment of the corporate
obligations and for handling of the banking for the Company, requested that
her brother, [Mr. Guye], provide her with all the invoices for work done for
customers, that he provide her with the payments that he had received from
the customers to deposit into the corporate account, and that he cease using
the credit cards for personal reasons – all of which were ignored by Mr.
Guye. Mrs. Judd also discussed her concerns about the company charges
Mr. Guye was incurring with her Parents, who acknowledged that each of
the children had benefitted from the acquisition of ownership of the
Company, but that they were reluctant to become involved in the dispute.
•••
In order to attempt to protect the Company assets, Mrs. Judd removed Mr.
Guye’s privileges for the company credit cards then in existence. She also
changed the post office box, or created a new one, and left the old one but
changed the street address to the new one. She opened new bank accounts
in the name of . . . [WMDC] . . . and attempted to set up independent
measures to deposit income from [WMDC] and to make the payments that
she was able to make for the obligations of [WDMC]. Mr. Guye, likewise,
took action, depositing the checks that he had received from customers into
a new bank account on which he was the sole signatory. He locked Mrs.
Judd out of the [WMDC] building. He opened two new credit cards for
[WMDC] in his name only, and refused to allow Mrs. Judd access to the
offices. He also stopped paying her salary of $495 per week. Since
September 2012 to November 1, 2014, this amount is $55,440. He refused
to provide her with information or documentation concerning the finances
of [WMDC], including information about jobs, invoices, receipts, expenses,
income, bills, or debts. As to her rights as a shareholder equal to fifty
percent (50%) ownership of [WMDC], Mr. Guye completely diverted
control of the Company to himself. He concluded that he was accountable
to no one.
•••
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The Court concludes that Mr. Guye has operated [WMDC] for his own
benefit and that his actions are illegal and constitute a gross abuse of the
corporate structure, both for the purpose of evading taxes and to evade
responsibility to the other shareholder in the Company, his sister, [Mrs.]
Judd. The [parties’] Parents had the stock powers, and they rightfully had
the ability to elect Mr. Guye as President of the Corporation; those stock
powers allowed them to vote the stock. However, they did not allow anyone
holding those stock powers to condone the wrongful use of corporate assets
and income such as that perpetrated by Mr. Guye for his personal benefit to
the detriment of [WMDC] and to its other shareholder, Mrs. Judd.
The record clearly demonstrates that Mr. Guye has been using corporate
assets solely for his own and his family’s personal benefit. There has been a
total disregard of the corporate structure on the basis that this is the way in
which his father operated the Company. The Court does not concur with
Mr. Guye’s statement that Mr. Guye, Sr. operated the Company in the same
manner as Mr. Guye. At the time Mr. Guye, Sr. operated the business as a
sole proprietorship, he was entitled to take certain liberties because he was
solely responsible for the income and outgo of the company. However,
once the Corporation was established, everyone had to comply with the law
governing corporations; children cannot be treated differently than any
other shareholder. The Court is persuaded that if the [parties’] Parents had
sold this business to two independent businessmen, they would not have
tolerated a person misusing the Corporation the way Mr. Guye has misused
the Corporation.
The Court finds that Mr. Guye was cavalier in his testimony, and finds that
Mr. Guye was not a credible witness, and the Court, to a great extent, did
not believe his testimony. Although the Court recognizes that Mr. Guye
may have occasionally treated his employees to breakfast and occasionally
purchased gas on the company credit cards, the Court is convinced, based
on the evidenced presented, that Mr. Guye engaged in a pervasive,
intentional, and willful ignorance of the corporate form. In short, Mr. Guye
treated [WMDC] like a personal checking account, which is not permitted. .
..
For the foregoing reasons, we affirm the trial court’s decision to pierce the
corporate veil of WMDC in order to hold Defendant personally liable for the
corporation’s debt to Plaintiff.
II. FRIVOLOUS APPEAL
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Plaintiff seeks to recover the attorneys’ fees and costs under Tenn. Code Ann. §
27-1-122.
Tenn. Code Ann. § 27-1-122 provides that “[w]hen it appears to any reviewing
court that the appeal from any court of record was frivolous or taken solely for delay, the
court may, either upon motion of a party or of its own motion, award just damages
against the appellant, which may include, but need not be limited to, costs, interest on the
judgment, and expenses incurred by the appellee as a result of the appeal.” Whether to
award attorney’s fees on appeal is within this court’s sole discretion. Wills v. City of
Memphis, 457 S.W.3d 30, 51 (Tenn. Ct. App. 2014) (citing Archer v. Archer, 907 S.W.2d
412, 419 (Tenn. Ct. App. 1995)). When considering a request for attorney’s fees, we will
consider “the requesting party’s ability to pay, the requesting party’s success on appeal,
whether the appeal was taken in good faith, and any other relevant equitable factors.”
Culbertson v. Culbertson, 455 S.W.3d 107, 158 (Tenn. Ct. App. 2014) (citing Moran v.
Willensky, 339 S.W.3d 651, 666 (Tenn. Ct. App. 2010)). After considering these factors,
we are unable to conclude that this appeal was frivolous or taken solely for delay.
Therefore, we deny Plaintiff’s request.
IN CONCLUSION
The judgment of the trial court is affirmed, and this matter is remanded with costs
of appeal assessed against the appellant, Carlton Guye.
________________________________
FRANK G. CLEMENT JR., P.J., M.S.
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