Multimedia Pub. of South Carolina, Inc. v. Mullins

• Decision Date: 10 March 1993
• Docket Number: No. 23860,A-L,23860
• Parties: MULTIMEDIA PUBLISHING OF SOUTH CAROLINA, INC., d/b/a Greenville News-Piedmont Company, Respondent, v. J.R. MULLINS, Harry H. Shaw and Food Stores of Greenville, Inc., d/b/a Sav-ot Food Stores/Greenville Store, Inc. and d/b/a Sav-ot Food Stores of Greenville, jointly and severally, Defendants, of whom J.R. Mullins is, Petitioner. . Heard
• Court: South Carolina Supreme Court

Page 569

431 S.E.2d 569

314 S.C. 551

MULTIMEDIA PUBLISHING OF SOUTH CAROLINA, INC., d/b/a Greenville News-Piedmont Company, Respondent, v. J.R. MULLINS, Harry H. Shaw and Food Stores of Greenville Inc., d/b/a Sav-A-Lot Food Stores/Greenville Store, Inc. and d/b/a Sav-A-Lot Food Stores of Greenville, jointly and severally, Defendants of whom J.R. Mullins is, Petitioner.

No. 23860.

Supreme Court of South Carolina.

Heard March 10, 1993.

Decided May 17, 1993.

J. Jackson Thomas and Craig A. Snook, both of Stevens, Stevens, Thomas & Snook, P.A., Myrtle Beach, for petitioner.

Dennis H. Smith, of Smith & Klose, P.A., Surfside Beach, for respondent.

HARWELL, Chief Justice:

J.R. Mullins (Mullins), the sole director and shareholder of Food Stores of Greenville (FSG), petitioned for writ of certiorari, alleging that the Court of Appeals erred in affirming the trial judge's application of the "fundamental unfairness" prong of the test for piercing FSG's corporate veil. Multimedia Publishing of South Carolina, Inc. v. Mullins, Op. No. 92-UP-079 (S.C. Ct.App. filed April 15, 1992). We disagree and affirm.

I. FACTS

In 1987, Mullins, the owner or majority shareholder of approximately eighteen corporations across the southeast, incorporated Food Stores of South Carolina (FSSC) and opened two grocery stores in the Myrtle Beach area doing business as "Sav-A-Lot." In June 1988, Mullins incorporated FSG with $1000.00 in capital for the purpose of opening a third Sav-A-Lot in Greenville. Mullins then instructed Harry Shaw (Shaw), FSG's vice president, to obtain newspaper advertising with the Greenville News-Piedmont (Multimedia). FSG contracted with Multimedia through Shaw and subsequently received advertisement.

Both FSSC stores closed in August and transferred much of their inventory to FSG as an informal inter-corporate loan. FSG, operating under the direction of Shaw and Virginia accountant Ken Webb, transferred approximately $144,000.00 in cash and assets to Mullins and corporations in which he was the dominant or sole shareholder, purportedly to repay personal and inter-corporate debts owed by FSG. The Greenville Sav-A-Lot closed in November, leaving many creditors, including Multimedia, unpaid.

Multimedia commenced this breach of contract action to recover the balance due on FSG's advertising account. Multimedia alleged that FSG was not responsive to judgment and sought to pierce the corporate veil to hold Mullins, as FSG's sole shareholder, personally liable for the debt. The trial judge pierced FSG's corporate veil and Mullins appealed, alleging that the trial judge misapplied the two prong test set forth in Sturkie v. Sifly, 280 S.C. 453, 313 S.E.2d 316 (Ct.App.1984). The Court of Appeals affirmed. We granted certiorari to review the narrow question whether the Court of Appeals erred in applying the second prong of the Sturkie test.

II. DISCUSSION

In Sturkie, the Court of Appeals adopted a two prong test for piercing the corporate veil. The first prong is an eight factor analysis of the shareholder's relationship to the corporation. The second prong requires that a plaintiff prove the "fundamental unfairness" of recognizing the corporate veil by establishing, among other things, that the defendant was aware of the plaintiff's claim against the corporation. Sturkie, 280 S.C. at 459, 313 S.E.2d at 319. Mullins alleges that the second prong's requirement that a defendant be "aware" of the claim against the corporation requires proof that he had actual knowledge of the claim. We disagree.

Mullins relies on Daniels v. Berry, 148 S.C. 446, 146 S.E. 420 (1929), in which we interpreted the term "aware" to require actual knowledge. In our view, Mullins's reliance is misplaced. The Daniels interpretation of "aware" was made in the context of a statute imposing civil and criminal liability on bank directors who accepted deposits while aware of the bank's insolvency. ¹ The narrow reading given to the term "aware" in Daniels can be attributed to the rule of statutory construction requiring that penal statutes be construed strictly. See, e.g., State v. Breech, --- S.C ----, 417 S.E.2d 873 (1992). Accordingly, Daniels is not dispositive of the knowledge required to prove fundamental unfairness under the common law standard set forth in the second prong of Sturkie.

Mullins's argument that actual knowledge of a claim is required in order to show fundamental unfairness would necessitate a standard for fundamental unfairness even greater than the standard by which fraud may be found. See First State Savings and Loan v. Phelps, 299 S.C. 441, 446, 385 S.E.2d 821, 824 (1989) (fraud may be established with either knowledge of falsity or reckless disregard for the truth). Fundamental unfairness can exist in the absence of fraud. Federal Deposit Ins. Corp. v. Sea Pines Co., 692 F.2d 973, 976 (1982), cert. denied, 461 U.S. 928, 103 S.Ct. 2089, 77 L.Ed.2d 299 (1983). It follows that fundamental unfairness may be proved by a lesser showing than the defendant's reckless disregard for whether claims against the corporation exist.

It is settled law in South Carolina that when a person has notice of facts as are sufficient to put him on inquiry, and those facts, if pursued with due diligence, would lead to knowledge of other facts, he must be presumed to have knowledge of the undisclosed facts. Norris v. Greenville S. & A. Ry. Co., 111 S.C. 322, 330, 97 S.E. 848, 850 (1919). In accordance with this standard, we hold that a person is "aware" of a claim against the corporation for the purpose of the second prong of Sturkie if he has notice of facts which, if pursued with due diligence, would lead to knowledge of the claim.

Mullins contends, however, that he cannot fairly be charged with knowledge of the claims against FSG because he relinquished all control of FSG's daily operations to others. We disagree.

Mullins's claim that he lacked knowledge because he left the management of FSG to others is the equivalent of urging his own negligence and dereliction of...