DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co.

• Citation: 540 F.2d 681
• Decision Date: 13 May 1976
• Docket Number: No. 75-1653,75-1653
• Parties: DeWITT TRUCK BROKERS, INC., Appellee, v. W. RAY FLEMMING FRUIT COMPANY and W. Ray Flemming, Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 681

540 F.2d 681

DeWITT TRUCK BROKERS, INC., Appellee, v. W. RAY FLEMMING FRUIT COMPANY and W. Ray Flemming, Appellants.

No. 75-1653.

United States Court of Appeals Fourth Circuit.

Argued Dec. 4, 1975.

Decided May 13, 1976.

W. Ray Berry, Columbia, S. C., for appellants.

Henry H. Taylor, West Columbia, S. C. (Dent, Kirkland, Taylor & Wilson, West Columbia, S. C., on brief), for appellee.

Before RUSSELL and WIDENER, Circuit Judges, and THOMSEN, Senior District Judge. ^*

DONALD RUSSELL, Circuit Judge:

In this action on debt, the plaintiff seeks, by piercing the corporate veil under the law of South Carolina, to impose individual liability on the president of the indebted corporation individually. ¹ The District Court, making findings of fact which may be overturned only if clearly erroneous, pierced the corporate veil and imposed individual liability. The individual defendant appeals. We affirm.

At the outset, it is recognized that a corporation is an entity, separate and distinct from its officers and stockholders, and that its debts are not the individual indebtedness of its stockholders. This is expressed in the presumption that the corporation and its stockholders are separate and distinct. Fishman v. State (1973), 128 Ga.App. 505, 197 S.E.2d 467, 473. And this oft-stated principle is equally applicable, whether the corporation has many or only one stockholder. ² But this concept of separate entity is merely a legal theory, "introduced for purposes of convenience and to subserve the ends of justice," ³ and the courts "decline to recognize (it) whenever recognition of the corporate form would extend the principle of incorporation 'beyond its legitimate purposes and (would) produce injustices or inequitable consequences.' " Krivo Industrial Supp. Co. v. National Distill. & Chem. Corp. (5th Cir. 1973), 483 F.2d 1098, 1106, modified factually 490 F.2d 916; Sell v. United States (10th Cir. 1964), 336 F.2d 467, 472; Stone v. Eacho (4th Cir. 1942), 127 F.2d 284, 288-9, cert. denied, 317 U.S. 635, 63 S.Ct. 54, 87 L.Ed. 512 (1942); Jennings v. Automobile Sales Co. (1917), 107 S.C. 514, 515, 93 S.E. 188. Accordingly, "in an appropriate case and in furtherance of the ends of justice," the corporate veil will be pierced and the corporation and its stockholders "will be treated as identical." 18 Am.Juris.2d at 559.

This power to pierce the corporate veil, though, is to be exercised "reluctantly" ⁴ and "cautiously" ⁵ and the burden of establishing a basis for the disregard of the corporate fiction rests on the party asserting such claim. Coryell v. Phipps (5th Cir. 1942), 128 F.2d 702, 704, aff., 317 U.S. 406, 63 S.Ct. 291, 87 L.Ed. 363 (1943); Aamco Automatic Transmissions, Inc. v. Tayloe (E.D.Pa.1973), 368 F.Supp. 1283, 1299; Haynes v. Champagne Tile Corporation (E.D.La.1964), 228 F.Supp. 157, 159.

The circumstances which have been considered significant by the courts in actions to disregard the corporate fiction have been "rarely articulated with any clarity." Swanson v. Levy (9th Cir. 1975), 509 F.2d 859, 861-2. Perhaps this is true because the circumstances "necessarily vary according to the circumstances of each case," ⁶ and every case where the issue is raised is to be regarded as "sui generis (to) * * * be decided in accordance with its own underlying facts." ⁷ Since the issue is thus one of fact, its resolution "is particularly within the province of the trial court" ⁸ and such resolution will be regarded as "presumptively correct and (will) be left undisturbed on appeal unless it is clearly erroneous." ⁹

Contrary to the basic contention of the defendant, however, proof of plain fraud is not a necessary element in a finding to disregard the corporate entity. This was made clear in Anderson v. Abbott (1944), 321 U.S. 349, 362, 64 S.Ct. 531, 538, 88 L.Ed. 793, reh. denied, 321 U.S. 804, 64 S.Ct. 845, 88 L.Ed. 1090 (1944), where the Court, after stating that "fraud" has often been found to be a ground for disregarding the principle of limited liability based on the corporate fiction, declared:

" * * * The cases of fraud make up part of that exception (which allow the corporate veil to be pierced, citing cases). But they do not exhaust it. An obvious inadequacy of capital, measured by the nature and magnitude of the corporate undertaking, has frequently been an important factor in cases denying stockholders their defense of limited liability." (Italics added.)

This holding was recently restated in National Marine Service, Inc. v. C. J. Thibodeaux & Company (5th Cir. 1974), 501 F.2d 940, 942:

" * * * Although there is no doubt that fraud is a proper matter of concern in suits to disregard corporate fictions, it is not a prerequisite to such a result, especially when there is gross undercapitalization or complete domination of the corporate entity under scrutiny."

In Kirvo Industrial Supp. Co. v. National Distill. & Chem. Corp., supra, 483 F.2d at 1106-7, the Court expressed the same thought:

" * * * the theory of liability under the 'instrumentality' doctrine does not rest upon intent to defraud. It is an equitable doctrine that places the burden of the loss upon the party who should be responsible." ¹⁰

Nor is there any basis for assuming the rule in South Carolina, which is controlling in this diversity case, to be different from the general rule declaring fraud not to be a necessary predicate for piercing the corporate veil. In fact, the South Carolina court has stated the doctrine for disregarding the corporate entity in terms similar to the general rule earlier phrased. Thus, in Long v. Carolina Baking Co., Inc. (1939), 190 S.C. 367, 377, 3 S.E.2d 46, 50, it held that, while "(t)he corporate fiction and the rules surrounding it have been of inestimable service in the affairs of business, * * * they must be applied in such a manner as to promote justice, not to hinder or defeat it." It is true that in Parker Peanut Company v. Felder (1942), 200 S.C. 203, 215, 20 S.E.2d 716, 720, in which the corporate fiction was disregarded, fraud was found to exist but this was in the context of a general statement "that the corporate fiction may be disregarded in a proper case," thereby clearly intimating that the application of the doctrine was not restricted to cases of fraud, though it is likely, as the Court declared in Abbott, fraud will provide the most common illustration of the application of the doctrine. That plain fraud is not a prerequisite to relief under the doctrine as followed in South Carolina seems clear from the decision in Jennings v. Automobile Sales Co. (1917), 107 S.C. 514, 516, 93 S.E. 188, where the Court upheld the piercing of the corporate veil on the "alter ego" theory without any finding of specific fraud. It is safe then to assume that the South Carolina law is in accord with the general rule in this area.

On the other hand, equally as well settled as is the principle that plain fraud is not a necessary prerequisite for piercing the corporate veil is the rule that the mere fact that all or almost all of the corporate stock is owned by one individual or a few individuals, will not afford sufficient grounds for disregarding corporateness. ¹¹ But when substantial ownership of all the stock of a corporation in a single individual is combined with other factors clearly supporting disregard of the corporate fiction on grounds of fundamental equity and fairness, courts have experienced "little difficulty" and have shown no hesitancy in applying what is described as the "alter ego" or "instrumentality" theory in order to cast aside the corporate shield and to fasten liability on the individual stockholder. Iron City S. & G. Div. of McDonough Co. v. West Fork Tow. Corp., supra, 298 F.Supp. at 1098. ¹²

But, in applying the "instrumentality" or "alter ego" doctrine, the courts are concerned with reality and not form, with how the corporation operated and the individual defendant's relationship to that operation. Collins v. United States (S.D.Ga.1974), 386 F.Supp. 17, 20, aff'd, 5 Cir.,514 F.2d 1282. One court has suggested that courts should abjure "the mere incantation of the term 'instrumentality' " in this context and, since the issue is one of fact, should take pains to spell out the specific factual basis for its conclusion. Kirvo Industrial Supp. Co. v. National Distill. & Chem. Corp., supra, 483 F.2d at 1103. And the authorities have indicated certain facts which are to be given substantial weight in this connection. One fact which all the authorities consider significant in the inquiry, and particularly so in the case of the one-man or closely-held corporation, is whether the corporation was grossly undercapitalized for the purposes of the corporate undertaking. Henn, Law of Corporations 2d Ed. (1970), at 257; Anderson v. Abbott, supra, 321 U.S. at 362, 64 S.Ct. 531; Stone v. Eacho, supra, 127 F.2d at 288; Luckenback S.S. Co. v. W. R. Grace & Co. (4th Cir. 1920), 267 F. 676, 681, cert. denied, 254 U.S. 644, 41 S.Ct. 14, 65 L.Ed. 454 (1920); Francis O. Day Co. v. Shapiro (1959), 105 U.S.App.D.C. 392, 267 F.2d 669, 673; Arnold v. Phillips (5th Cir. 1941), 117 F.2d 497, 502, cert. denied, 313 U.S. 583, 61 S.Ct. 1102, 85 L.Ed. 1539 (1940); Puamier v. Barge BT 1793, supra, 395 F.Supp. at 1039, n. 10; Mull v. Colt Co. (S.D.N.Y. 1962), 31 F.R.D. 154, 163; Kilpatrick Bros., Inc. v. Poynter (1970), 205 Kan. 787, 473 P.2d 33, 40; North Arlington Med. Bldg., Inc. v. Sanchez Const. Co. (1970), 86 Nev. 515, 471 P.2d 240, 244; Automotriz Del Golfo De Cal. v. Resnick (1957), 47 Cal.2d 792, 306 P.2d 1, 63 A.L.R.2d 1042, 1048, with annotation; ¹³ Gillespie, The Thin Corporate Line: Loss of Limited Liability Protection, 45 N.D.L.Rev. 363, 377-8 (1969). And, "(t)he obligation to provide adequate capital begins with incorporation and is a continuing obligation thereafter * * * during the corporation's operations." See Gillespie, supra ; Dix, Adequate Risk Capital, 52 Nw.U.L.Rev. 478, 494 (1958...