Federal Deposit Ins. Corp. v. Sea Pines Co., 81-2134
| Citation | 692 F.2d 973 |
| Decision Date | 28 October 1982 |
| Docket Number | No. 81-2134,81-2134 |
| Parties | FEDERAL DEPOSIT INSURANCE CORP., Appellant, v. SEA PINES COMPANY, Appellee. |
| Court | United States Courts of Appeals. United States Court of Appeals (4th Circuit) |
J. Randolph Pelzer, Pelzer & Chard, P.C., Federal Deposit Insurance Corp., Charleston, S.C., for appellant.
H. Brewton Hagood, Morris D. Rosen, Charleston, S.C., Barry L. Johnson, Joab M. Dowling, Beaufort, S.C., for appellee.
Before HALL and SPROUSE, Circuit Judges, and DOUMAR *, District Judge.
This matter is on appeal from the decision of the District Court for the District of South Carolina, wherein the plaintiff/appellant, the Federal Deposit Insurance Corporation (FDIC) alleged that Sea Pines Company, the parent, guaranteed a particular indebtedness of its subsidiary, Point South, Inc., to the American Bank & Trust Company (AB & T), the predecessor in interest to FDIC. Alternatively, FDIC sought to pierce the corporate veil of Point South, Inc. The Court held that Sea Pines Company, the parent, did not guarantee the particular indebtedness. The District Court also concluded that the actions of the parent through the subsidiary were neither unjust nor fundamentally unfair and therefore declined to pierce the corporate veil. We reverse and remand.
Point South, Inc. was one of a number of subsidiary corporations utilized by the parent, Sea Pines Company. Point South, Inc. was initially capitalized with $1,000 by Charles B. Frazier and Joseph B. Frazier, Jr., who were two of the three-man executive committee of Sea Pines Company, the parent. 1 The subsidiary issued one hundred shares of capital stock and later 10% of its stock was transferred to Continental Mortgage Investors, and the remaining 90% of the stock was ultimately assigned to Sea Pines Company.
On February 19, 1973 AB & T issued to the subsidiary a loan commitment for $250,000 for a construction loan mortgage to enable Point South, Inc. to build a reception center on a parcel of the subsidiary's property, near the intersection of U.S. Highway 17 and Interstate 95 in South Carolina, to attract potential buyers to a planned development. The commitment itself was not assignable. The loan was closed on or about April 13, 1973, but the project was not funded at once as it was a construction loan. By September 4, 1973, approximately $133,000 of the $250,000 of the construction loan had been disbursed to Point South, Inc. There was no prohibition against assignability in the final note or mortgage, nor did the instrument call for an acceleration of the due date of the principal amount upon the sale of the property.
In August, 1973, Point South, Inc., the subsidiary, desired to sell the property to Point South Associates, a limited partnership, and lease it back. On August 29, 1973, Jeffrey Rhodes, then the assistant to the president of Sea Pines Company, wrote AB & T a letter on Sea Pines stationery which provided in pertinent part as follows:
Pursuant to our phone conversation, enclosed please find the documents for the sale/leaseback of the Point South Reception Center.
As we discussed Point South intends to sell the building and assign the mortgage to the purchasing entity. Point South Company and Sea Pines Company will guarantee the financing.
We have preserved your first right of refusal to provide the permanent financing.
AB&T did not respond to Mr. Rhodes' letter. The rent payable by Point South, Inc., the subsidiary, to Point South Associates (a/k/a Point South Company), the limited partnership, was guaranteed by Sea Pines Company, by a formal guarantee duly acted upon by the parent (R-742). However, no formal guarantee of the construction loan mortgage was ever issued to or requested by AB & T. The transaction was finalized on September 7, 1973.
In October, 1974, the subsidiary, Point South, Inc., and Sea Pines Company, acting through the common directors, mortgaged the equity of Point South, Inc. in a 76-acre tract as collateral for the loans of Sea Pines Company, the parent. The parent credited the debts which the subsidiary owed to the parent as alleged consideration for the subsidiary mortgaging its property and allowing the proceeds to go to the parent.
On May 30, 1975, the common directors of the corporations caused the sale and leaseback between Point South, Inc. and Point South Company to be canceled and Point South, Inc. repurchased the property. Point South, Inc. canceled the note and mortgage owed to it by Point South Associates, which was originally in the sum of $55,000. Sea Pines Company was released from its guarantee of rent payments on the reception center.
In February, 1973, Point South, Inc., the subsidiary, had a balance sheet showing properties or assets in excess of $2.5 million with a total net worth of $65,000, of which $1,000 was capital stock and $64,000 was retained earnings. 2 This highly leveraged subsidiary lost $242,000 between February, 1973 and February, 1974. In February, 1974, Point South, Inc. was insolvent, with a negative net worth of $177,000. 3 From February, 1974 until February, 1975, Point South, Inc., the subsidiary, continued to lose money so that by February, 1975, the total insolvency or negative net worth of Point South, Inc. was $1,949,000.00. 4
The District Court concluded that Sea Pines Company did not guarantee the indebtedness of Point South, Inc. and refused to pierce the corporate veil of Point South, Inc. finding no fundamental unfairness. On appeal, FDIC contends that the District Court erred in finding that the letter, from Jeffrey Rhodes dated August 29, 1973, did not guarantee the "indebtedness" of Point South, Inc. to AB & T and that the actions of the common directors of Point South, Inc. and Sea Pines Company were not fundamentally unfair.
The initial contention of the plaintiff is that the letter of August 29, 1973 by Jeffrey Rhodes, constituted a valid guarantee by Sea Pines to AB & T for the construction loan mortgage on the reception center.
The parent maintains that there was no consideration for or acceptance of the guarantee by AB & T, that there was no showing that Jeffrey Rhodes had any authority to make such a guarantee, and finally, that there was no indication that what was written was in any way a guarantee. The parent maintains that the word "guarantee" in relation to Point South Company (Associates) and Sea Pines Company, refers to the sale and leaseback of the reception center. Additionally, the parent contends that the word "financing" was a reference to the agreement of the parent to guarantee the rent due by the subsidiary, under the lease of the reception center, to the purchaser, Point South Company (Associates), the limited partnership.
FDIC contends that the initial commitment prohibited assignment of the mortgage and that this letter was forwarded to AB & T to receive their consent to the assignment of the mortgage. This, they contend, enabled the purchaser, Point South Company, to continue to receive the funds or proceeds of the construction mortgage loan of which approximately 50% was still unfunded as of September 1, 1973. FDIC further argues that the word "guarantee" could not refer to the guarantee of the lease payments or financing inasmuch as Point South Company (Associates) would not be guaranteeing the lease payments or rent to itself.
The District Court found that the plaintiff failed to show: consideration for the alleged guarantee; and that there was an acceptance of the alleged guarantee by AB & T as required by South Carolina law. The District Court concluded that the plaintiff failed to meet its burden of proving the essential elements of the alleged guarantee.
For the reasons hereinafter set forth, it is unnecessary for us to decide whether the letter did or did not constitute a valid accepted guarantee.
The appellant argues that the District Court's finding that actions of Point South, Inc. did not fit into a pattern of fundamental unfairness or injustice is clearly erroneous, and, therefore, the corporate veil should be pierced. FDIC contends that Sea Pines Company dominated Point South, Inc. and used the subsidiary for its benefit and to the detriment of the creditors of Point South, Inc. The appellee, Sea Pines Company, contends that FDIC failed to firmly establish sufficient grounds for the Court to find that the subsidiary was the alter ego of the parent and to establish that there was an injustice committed or fundamental unfairness exhibited sufficient for the piercing of the corporate veil. They urge this Court to adopt a stringent view of injustice amounting to a fraud.
It would serve no useful purpose to reiterate the postulates set forth by this Court in the case of DeWitt Truck Brokers v. W. Ray Flemming Fruit Co., 540 F.2d 681 (4th Cir.1976), since the District Court found that a sufficient number of the factors to pierce the corporate veil were present except the existence of injustice or fundamental unfairness.
The District Court found as a fact, inter alia, the following:
(1) Point South, Inc. was a subsidiary corporation of Sea Pines Company. Sea Pines Company owns 90% of Point South, Inc.
(2) Point South, Inc. is a South Carolina corporation.
(3) Sea Pines Company is a Georgia corporation principally operating in South Carolina.
(4) Point South, Inc. and Sea Pines Company had common directors and officers.
(5) Point South, Inc. adhered to corporate formalities.
(6) Point South, Inc. was financed in large part by Sea Pines Company.
(7) Sea Pines Company paid the salaries and expenses of Point South, Inc. with the expectation that they would be reimbursed.
(8) Sea Pines Company caused the property owned by Point South, Inc. to be mortgaged for the benefit of Sea Pines Company.
(9) During the period in question, the executives and officers of Point South, Inc. did not act independently of those of Sea Pines Company.
(10) AB & T made a loan to Point South,...
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