Hunting v. Elders

• Decision Date: 19 April 2004
• Docket Number: No. 3778.,3778.
• Citation: 597 S.E.2d 803,359 S.C. 217
• Court: South Carolina Court of Appeals
• Parties: Carol HUNTING, as Guardian ad Litem for Catherine L. Hitchcock, Respondent, v. William ELDERS, Samuel Chris Gordon and Elmyer Enterprises, Inc., Defendants of whom William Elders is, Appellant.

359 S.C. 217

597 S.E.2d 803

Carol HUNTING, as Guardian ad Litem for Catherine L. Hitchcock, Respondent, v. William ELDERS, Samuel Chris Gordon and Elmyer Enterprises, Inc., Defendants of whom William Elders is, Appellant.

No. 3778.

Court of Appeals of South Carolina.

Heard October 8, 2003.

Decided April 19, 2004.

Rehearing Denied June 25, 2004.

D. Mark Stokes, of N. Charleston, for Appellant.

Geoffrey H. Waggoner, Richard S. Rosen, and Alex B. Cash, all of Charleston, for Respondent.

STILWELL, J.:

This action was commenced to recover damages sustained by Catherine L. Hitchcock in an accident caused by a drunk driver. Carol Hunting, as guardian ad litem for Hitchcock, brought suit against Chris Gordon as the drunk driver, Elmyer Enterprises, Inc. as the owner and operator of the bar, and William Elders as the alter ego of the corporation. In the first portion of the bifurcated trial, damages of $1.5 million were awarded against Gordon and Elmyer Enterprises. The second phase of the trial, which is the subject of this appeal, resulted in a holding that Elders was the alter ego of Elmyer Enterprises, justifying piercing the corporate veil, thereby holding Elders personally liable for the $1.5 million verdict and the interest which had accrued from the date of the original judgment against the corporation. We affirm.

FACTS

We discern the following facts from the order of the unappealed first phase of the trial. Gordon became intoxicated while at Willie's, a bar operated by Elmyer Enterprises. Gordon was served alcohol despite being obviously intoxicated. After leaving the bar in an intoxicated state, he caused the accident in which Hitchcock was left permanently brain damaged. Hunting was awarded $1.5 million in actual damages against Gordon and Elmyer Enterprises. The jury also awarded $3,000 and $25,000 in punitive damages against Gordon and Elmyer Enterprises respectively. Subsequently, a non-jury trial was held on the issue of whether to pierce the corporate veil of Elmyer Enterprises and hold Elders liable for the judgment as its alter ego.

The facts as gleaned from the second trial reveal that Elmyer Enterprises was originally incorporated in 1981 and engaged in the business of selling tires. Elders and another shareholder operated the business until Elders bought out the other shareholder. The business then became inactive for several years.

In 1990, Elders opened two bars on property he owned. He originally held the liquor licenses in his own name. In 1993, he reinstated Elmyer Enterprises for the purpose of operating the bars. Each bar was capitalized with $1,000, which was deposited into separate bank accounts. The property and equipment used to operate the bars were leased to Elmyer Enterprises by other businesses formed and owned by Elders. Both bars operated video poker machines, which were leased from yet another of Elders' business corporations. That particular enterprise owned many more machines than were present in the bars belonging to Elmyer Enterprises.

In December 1993, Elders transferred several shares of stock in Elmyer Enterprises to his wife and niece. He designated his wife as a vice president and his niece as secretary and treasurer. However, his niece testified that she knew nothing about her ownership of shares of stock of Elmyer Enterprises or her selection as an officer of the company. Minutes were recorded that detailed the selections and the stock transfers.

During the trial, Hunting presented the testimony of Jan Waring-Woods, a forensic accountant, who testified money was siphoned from the corporation for Elders' personal use. She testified many records needed for an accurate audit of the corporation were either not created or not made available at the time of trial. After reviewing the corporate tax returns for the various companies Elders owned, as well as some of the records she managed to locate regarding the income of the business, she testified Elders siphoned off between $400,000 and $800,000 from the business over a three-year period. Additionally, she testified some of Elders' personal tax forms were altered prior to trial to eliminate information about dividend income from investment accounts Elders held during the time he ran the business.

Hunting also presented testimony from John Freeman, a law professor at the University of South Carolina. He testified that in his opinion the company was operated as a facade by Elders. Freeman maintained Elmyer Enterprises was grossly undercapitalized given its purpose of operating bars and considering the inherent risks associated with a business dispensing alcohol. His conclusion was that Elmyer Enterprises had income that was unaccounted for and profit that was not adequately revealed. He further testified that, in his opinion, Elders was the alter ego of Elmyer Enterprises.

Elders testified the income was as reported. He claimed detailed records were never kept by the company. He noted that any discrepancies in the records were the result of the way in which the bar was managed. He also argued the business was run as a statutory close corporation and as an S corporation. Therefore, it did not have to meet the normal business formalities and would likely mirror Elders as the majority shareholder. Elders claimed the business met its ongoing financial obligations and therefore was not undercapitalized.

The trial court found Elders' testimony was not credible, and the evidence presented at trial clearly indicated Elmyer Enterprises was operated as a mere facade for Elders. Thus, the court concluded Hunting met the burden of proof in establishing the factors necessary to pierce the corporate veil and hold Elders personally liable for the judgment originally awarded against Elmyer Enterprises.

STANDARD OF REVIEW

An action to pierce the corporate veil lies in equity, and therefore, this court may determine the facts according to its own view of the preponderance of the evidence. See C.T. Lowndes & Co. v. Suburban Gas & Appliance Co., 307 S.C. 394, 396, 415 S.E.2d 404, 405 (Ct.App.1991)

; Sturkie v. Sifly, 280 S.C. 453, 456-57, 313 S.E.2d 316, 318 (Ct.App.1984). The broad scope of review applicable to appeals in equity actions does not, however, require an appellate court to disregard the findings below or ignore the fact that the trial judge is in the better position to assess the credibility of the witnesses. Pinckney v. Warren, 344 S.C. 382, 387, 544 S.E.2d 620, 623 (2001).

LAW/ANALYSIS

Elders contends the trial court erred in piercing the corporate veil of Elmyer Enterprises and therefore holding him personally liable for the judgment. We disagree.

"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." DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 683 (4th Cir.1976). The South Carolina Supreme Court has ruled that the corporate entity may be disregarded in certain situations. See Baker v. Equitable Leasing Corp., 275 S.C. 359, 271 S.E.2d 596 (1980)

. "However, `piercing the corporate veil' is not a doctrine to be applied without substantial reflection." Baker, 275 S.C. at 367,

271 S.E.2d at 600. "The corporate form may be disregarded only where equity requires the action to assist a third party." Woodside v. Woodside, 290 S.C. 366, 370, 350 S.E.2d 407, 410 (Ct.App.1986). The party asserting the corporate veil should be pierced has the burden of proof. Id.

Generally, courts are reluctant to "disregard the integrity of the corporate entity." Sturkie, 280 S.C. at 459, 313 S.E.2d at 319.

If any general rule can be laid down, it is that a corporation will be looked upon as a legal entity until sufficient reason to the contrary appears; but when the notion of legal entity is used to protect fraud, justify wrong, or defeat public policy, the law will regard the corporation as an association of persons.

Id. at 457, 313 S.E.2d at 318.

In Sturkie, this court set forth a two-pronged test to be used to determine whether to pierce the corporate veil. "The first part of the test, an eight-factor analysis, looks to observance of the corporate formalities by the dominant shareholders. The second part requires that there be an element of injustice or fundamental unfairness if the acts of the corporation be not regarded as the acts of the individuals." Id. at 457-58, 313 S.E.2d at 318. The first eight factors were delineated in Dumas v. InfoSafe Corp., 320 S.C. 188, 463 S.E.2d 641 (Ct.App.1995):

(1) whether the corporation was grossly undercapitalized;

(2) failure to observe corporate formalities;

(3) non-payment of dividends;

(4) insolvency of the debtor corporation at the time;

(5) siphoning of funds of the corporation by the dominant stockholder;

(6) non-functioning of other officers or other directors;

(7) absence of corporate records; and

(8) the fact that the corporation was merely a facade for the operations of the dominant stockholder.

Dumas, 320 S.C. at 192,463 S.E.2d at 644. "The conclusion to disregard the corporate entity must involve a number of the eight factors, but need not involve them all." Id. (citing Cumberland Wood Prods. v. Bennett, 308 S.C. 268, 417 S.E.2d 617 (Ct.App.1992)). There is a second prong contained in Sturkie, but it need not be reached until and unless the requirements of the first prong are met.

Neither Sturkie nor any other case cited by the parties has set forth the weight that must be accorded to each of the eight factors, nor has any case required that each factor be accorded equal weight with the others. Additionally, in applying the eight-factor test of the first prong set out in Sturkie, significant changes in basic South Carolina corporate law and federal and state tax law have somewhat complicated the analysis. The ability under state corporate law to adopt and operate under a statutory close corporation...