920 F.2d 827 (11th Cir. 1991), 87-8945, United States v. Fidelity Capital Corp.

Docket Nº:87-8945.
Citation:920 F.2d 827
Party Name:UNITED STATES of America, Plaintiff-Appellant, v. FIDELITY CAPITAL CORPORATION, a Georgia Corporation, Defendant, Commonwealth Mortgage Corporation of America, Intervenor-Appellee.
Case Date:January 10, 1991
Court:United States Courts of Appeals, Court of Appeals for the Eleventh Circuit

Page 827

920 F.2d 827 (11th Cir. 1991)

UNITED STATES of America, Plaintiff-Appellant,


FIDELITY CAPITAL CORPORATION, a Georgia Corporation, Defendant,

Commonwealth Mortgage Corporation of America, Intervenor-Appellee.

No. 87-8945.

United States Court of Appeals, Eleventh Circuit

January 10, 1991

Page 828

[Copyrighted Material Omitted]

Page 829

G. Michael Banick, Ronald T. Gold, Atlanta, Ga., for plaintiff-appellant.

Joseph R. Manning, Thomas T. Tate, Morris, Manning & Martin, Atlanta, Ga., for intervenor-appellee.

Appeal from the United States District Court for the Northern District of Georgia.

Before TJOFLAT, Chief Judge, FAY, Circuit Judge, and SHARP [*], District Judge.

TJOFLAT, Chief Judge:

In our earlier decision in this matter, United States v. Fidelity Capital Corp., 888 F.2d 1344 (11th Cir.1989) (Fidelity I ), we remanded the case to the district court to determine whether Fidelity Capital Corporation (Fidelity), a company licensed as a Small Business Investment Company (SBIC) under the provisions of the Small Business Investment Act of 1958, Pub.L. No. 85-699, 72 Stat. 689 (codified as amended at 15 U.S.C. Secs. 661-697c (1988)), was the alter ego of Alfred F. Skiba, its president and the sole shareholder of its parent company. We instructed the district court to make findings of fact and conclusions of law on the alter ego issue and to certify its holding to this court. The district court has done so, and we now proceed to a resolution of this dispute. 1

We organize the opinion as follows. In part I, in subpart A, we outline the federal provisions governing SBICs, and, in subpart B, we state the relevant facts as found by the district court, most of which are undisputed. 2 In part II, we set forth the district court's application of Georgia law 3 to these facts and its conclusion that Fidelity was Skiba's alter ego. In part III, we find that the district court erred in its application of the law to the facts.



Congress passed the Small Business Investment Act of 1958 (the Act) in order to encourage the growth of small businesses by compensating for the difficulty they

Page 830

may have in obtaining financing from conventional lenders. 4 The Act accordingly authorizes the Small Business Administration (SBA) 5 to license SBICs, which are corporations or partnerships that provide capital to small businesses. 15 U.S.C. Sec. 681. 6 The SBA lends money to its licensees by purchasing or guaranteeing their debentures; SBICs use these funds to assist small businesses in the manner permitted by the Act and the regulations that the SBA has promulgated thereunder. Id. Secs. 683(a)-(b), 687(c); 13 C.F.R. Sec. 107.201 (1990). 7 The Act allows SBICs to finance small businesses in two major ways, by long-term loans or through equity investment. 15 U.S.C. Secs. 684(a), 685(a); 13 C.F.R. Secs. 107.320, .402. 8

The Act and the regulations limit SBICs' investment decisions by governing the amount, terms, and conditions of financing they may provide. For instance, most SBICs must have a diversified portfolio of investments in small businesses, and certain types of investments, such as real estate, are strictly curtailed. Id. Sec. 107.101(c). 9 Similarly, the SBA limits the amount of financial assistance an SBIC may provide to any one small business to twenty percent of the SBIC's private capital. 15 U.S.C. Sec. 686(a); 13 C.F.R. Sec. 107.303. 10 All loans made by SBICs must be "of such sound value, or so secured, as reasonably to assure repayment." 15 U.S.C. Sec. 685(e). 11 Any control an SBIC (or its officers, directors, and related companies) acquires over a small business in which it invests must be temporary, subject to a written agreement to relinquish control within seven years. 13 C.F.R. Sec. 107.801. 12 Additionally, SBICs may not

Page 831

provide financing to "associates," which include officers, directors, major shareholders, and related companies, 15 U.S.C. Sec. 687d; 13 C.F.R. Sec. 107.3(a)-(h), without SBA approval. Id. Sec. 107.903(b)(1). 13

Besides limiting SBICs' financing decisions, the SBA also controls many of their other business decisions. For instance, SBICs must maintain a certain level of private capital. 15 U.S.C. Sec. 682(a); 13 C.F.R. Sec. 107.101(d). 14 In addition, SBICs may not, without the written consent of the SBA, make any distributions to a shareholder other than periodic payments out of retained earnings based on the capital contributions of the shareholder or increase salaries beyond an approved amount. Id. Sec. 107.203(b)(3)(ii)-(iii). The SBA must approve any merger, consolidation, reorganization, or change of ownership or control. Id. Secs. 107.601, .803. 15

The SBA enforces the Act and regulations by requiring SBICs to make detailed filings and reports, id. Sec. 107.1002, and through periodic SBA examinations of every SBIC, 15 U.S.C. Sec. 687b(c). If an SBIC violates the Act or regulations, the SBA may petition a federal court to revoke the company's license, id. Sec. 687a(a), obtain an injunction restraining future violations, id. Sec. 687c(a), ask the court to take jurisdiction of the SBIC's assets and appoint the SBA as receiver, id. Sec. 687c(b)-(c), 16 or petition the court to dissolve the company and declare its rights and privileges under the Act forfeit, id. Sec. 687(d). 17 A loan or other transaction that violates either the Act or the regulations, however, is still valid and enforceable between the parties. 18 Talco Capital Corp. v. Canaveral Int'l Corp., 225 F.Supp. 1007, 1013-14 (S.D.Fla.1964), aff'd, 344 F.2d 962 (5th Cir.1965). 19


Fidelity was incorporated under Georgia law and licensed as an SBIC in late 1969, and soon merged with another SBIC, Business Investors, Inc., which had been incorporated in 1961 and was already indebted to the SBA. In 1979, Skiba and an associate, John Sisk, formed American Financial Resources, Inc. (American) to purchase the shares of Fidelity, which were owned by a subsidiary of Fidelity Mutual Life Insurance Company. 20 Skiba and Sisk each owned fifty percent of American. Their

Page 832

purchase of Fidelity was motivated in part by Fidelity's "grandfathered" real estate license: the SBA, when it licensed Fidelity, had allowed the company to invest exclusively in real estate, and when it later promulgated regulations limiting real estate investments, see supra p. 829 & note 9, it permitted Fidelity to continue the investment pattern authorized by earlier law. When American purchased its shares, Fidelity owed the SBA $9.6 million plus interest, and presumably already had a portfolio of investments in small businesses owning real estate. 21 It had private capital of approximately $3.5 million.

Skiba acquired Sisk's fifty percent interest in American in 1981; he has been president and sole director of American ever since. He was president of Fidelity after American purchased it, and became sole director after he purchased Sisk's American stock; the SBA, as receiver for Fidelity, removed him from office in 1986. Fidelity leased its office space from American, and paid American to manage the company, as it had no employees of its own. American and Fidelity had the same telephone number and filed consolidated tax returns; each company, however, maintained separate books and records, kept its own corporate minutes, and had its own federal employer identification number. Although American's financial report included Fidelity, Fidelity also filed a separate financial report, as the SBA regulations required.

The events that led to the conflict in this case began in 1980 when Skiba and Sisk caused either Fidelity or American, in association with an individual named Robert C. Hill, to form a real estate development corporation, Townehouse Concepts, Inc. (Townehouse). 22 In September of that same year, Fidelity financed Townehouse's purchase of a parcel of real estate in Atlanta, Georgia (the Peachtree/Cantrell property). Because the seller, Southeastern Land Fund, Inc. (Southeastern), preferred to hold a note from Fidelity rather than the newly-formed Townehouse, Fidelity purchased the property for $400,000 and thereafter conveyed the property to Townehouse instead of advancing the purchase price directly to Townehouse. Fidelity gave Southeastern a note secured by a mortgage on the property for $300,000 of the purchase price (the Southeastern mortgage), and paid $100,000 in cash. As consideration for Fidelity's conveyance to Townehouse, Townehouse assumed Fidelity's $300,000 obligation to Southeastern; Townehouse also appears to have entered on its books an obligation to repay Fidelity the $100,000 cash paid to Southeastern. The deed conveying the property from Fidelity to Townehouse was recorded after a delay of several months, which Skiba stated was due to the relationship between the companies. 23

Fidelity also financed other real estate purchases by Townehouse, and lent it additional funds for predevelopment costs. In addition, Fidelity paid $150,000 of the $300,000 Southeastern mortgage; this payment appears to have been added to the amount Townehouse owed Fidelity. None of the loans are supported by formal documentation

Page 833

apart from entries on each company's books evidencing intercorporate obligations, and they typically had no repayment date. Skiba and Robert L. Dodd, Jr., his attorney, represented both corporations in each loan. As a result of all these transactions, by April 2, 1982, Townehouse owed Fidelity over $1.7 million and owned the Peachtree/Cantrell property, another lot located at Peachtree and 15th Streets, and the stock of a corporation called DeFoors Place, Inc.

In 1981, Fidelity defaulted on its debt to the SBA, and the SBA demanded full payment. Besides defaulting, Fidelity had violated the regulations by...

To continue reading