Mid-South Mgmt. v. Sherwood Dev.

Decision Date29 June 2007
Docket NumberNo. 4271.,4271.
CourtSouth Carolina Court of Appeals
PartiesMID-SOUTH MANAGEMENT COMPANY INCORPORATED And William C. Buchheit Trust A, as Partners Of Spartanburg Beach Cove Associates, a General Partnership and a Joint Venturer Of Beach Cove Associates Joint Venture, And Beach Cove Associates Joint Venture, Appellants, v. SHERWOOD DEVELOPMENT CORPORATION, a Joint Venturer of Beach Cove Associates Joint Venture; Coastal Financial Corporation, Coastal Federal Savings Bank; Coastal Mortgage Bankers and Realty Co., Inc.; John Doe, which represent unidentified shareholders of Sherwood Development Corporation; Michael C. Gerald and James T. Clemmons, Respondents.

Michael B.T. Wilkes and D. Alan Lazenby, of Spartanburg, Michael Warner Battle, of Conway, for Appellant.

Robert E. Stepp, and Amy Hill, of Columbia, for Respondents.

PER CURIAM.

Mid-South Management Company, Inc., William C. Buchheit Trust A, and Beach Cove Associates Joint Venture (collectively, "Appellants"), appeal from the master-in-equity's order finding the parent companies of Sherwood Development Corporation were not liable to pay Appellants' judgment against Sherwood. We affirm.

FACTS

Spartanburg Beach Cove Associates is a general partnership with Mid-South and the William C. Buchheit Trust A as its majority partners. Spartanburg and Sherwood formed a Joint Venture, Beach Cove Associates Joint Venture. Spartanburg had two-thirds interest in the Joint Venture and Sherwood had the remaining one-third interest.1 All income and expenses of the Joint Venture were to be allocated in accordance with the parties' percentage interest. The sole purpose of the Joint Venture was to develop a multi-unit condominium complex in Myrtle Beach. Sherwood was incorporated by James Clemmons and Mike Gerald, president of Sherwood, as a wholly-owned subsidiary of Coastal Mortgage Bankers and Realty Company, Inc. Coastal Mortgage is the wholly owned subsidiary of Coastal Federal Savings Bank, which is the wholly owned subsidiary of Coastal Financial Corporation.

Sherwood was initially capitalized with $10,000, and had no liabilities at its inception. This was sufficient capital to cover the initial investment into the Joint Venture as required by the Joint Venture agreement. Additionally, Coastal Federal provided the financing for the acquisition of the land and construction by the Joint Venture. Sherwood maintained an active board of directors which held routine meetings in order to conduct the business of the corporation. However, the officers and directors of Sherwood were also in various positions of its parent companies and the company did not maintain separate offices. While Sherwood failed to have its own employees, the Joint Venture contracted with others to provide services. Finally, Sherwood maintained minutes of the board meetings and appropriate financial records, which were independent of its parent companies.

The Joint Venture acquired the property and constructed the condominiums in accordance with the Joint Venture agreement. The parties entered into the project believing it would be profitable and would be able to sustain its own operations. However, the project lost at least $7-8 million, of which Sherwood was responsible for one-third. Sherwood contributed approximately $2.5 million to the Joint Venture as capital calls were made in order to cover the losses generated by the project. The money provided for these capital calls came from Coastal Mortgage. Coastal Mortgage either purchased shares of treasury stock or provided debt funding for Sherwood to continue in operation.

In 1990, S.M. Johnson expressed his interest in purchasing the commercial operations of the Joint Venture as well as undeveloped land owned by the Joint Venture. In a letter to Vickie Myers, a representative of Spartanburg and the accountant for the Joint Venture, Gerald explained that selling may be in the Joint Venture's best interest. Additionally, Gerald explained: "A major area of concern for our Board is the recently enacted banking legislation which necessitates the divestiture of this type of investment by financial institutions. Therefore, Sherwood Development Corporation may, if operating deficits continue, find that it is incapable of supporting the hotel operation further." The deal to sell the commercial operations and property was not approved at that time.

In 1991, Delmar Jones was hired to act as property manager for the condominium project. He had discussions with the homeowners' association board members regarding complaints and problems with water intrusion. However, Jones was unclear about whether he ever reported the problems to the Joint Venture, Sherwood, or any of Sherwood's representatives. Additionally, Jones believed any problems with water intrusion in the common areas was the problem of the homeowners' association and not the Joint Venture.

Gerald was told in late 1992 by Jack Cochrane, president of the homeowners' association, that the association had hired an attorney to look into problems related to the parking garage. In addition, Cochrane stated the attorney "would look around and see if he could make that $200,000 case more like a $2 million case."

In February of 1993, the Joint Venture sold the commercial portion of the venture and some undeveloped property to S.M. Johnson. The proceeds from the sale were approximately $1 million. Sherwood received a distribution from the Joint Venture of approximately $330,000 for its one-third share of the proceeds. Spartanburg received the remainder. Sherwood did not pay dividends with the money, but it instead utilized that money to repay debt owed to Coastal Mortgage from its previous capital contributions to the Joint Venture. Spartanburg also made a distribution of its portion of the proceeds to its partners. Neither Sherwood, Spartanburg, nor anyone associated with the Joint Venture proposed setting aside any of the money in a reserve for future capital requirements.

In August 1993, the homeowners' association brought suit against, among others, the Joint Venture, seeking damages resulting from the stucco application and water intrusion. As a result, the Joint Venture hired counsel, who began negotiating a possible settlement. Sherwood maintained that it believed the partners of the Joint Venture should not be responsible for payment of any of the settlement. However, Sherwood offered $100,000 towards settlement if the offer was also approved by Coastal Mortgage.

Spartanburg instructed counsel the joint venture would contribute up to $1,000,000 to settle the suit. Counsel was able to settle the suit for a total of $5,450,000. Numerous other defendants and insurance policies contributed to the settlement amount. The Joint Venture was ultimately responsible for $835,000, which was paid by a check drawn on Mid-South Management, one of Spartanburg's partners. Spartanburg declined Sherwood's offer of contributing $100,000 toward the settlement.

After Sherwood refused to pay a capital call for its portion of the settlement amount, Appellants brought suit against Sherwood and its parent companies seeking to recover Sherwood's portion of the settlement. After the trial was bifurcated, Sherwood was found liable for one-third of the settlement amount pursuant to the Joint Venture agreement.2 The second phase of the trial was to determine whether Sherwood's parent companies or individual officers should be liable for the judgment obtained against Sherwood.

Appellants proffered three main theories seeking to hold Sherwood's parent companies liable: the alter-ego or instrumentality theory, the amalgamation of interest theory, and piercing the corporate veil. At the trial, Appellants offered the testimony of Dr. Oliver Wood, a professor at the University of South Carolina, as an expert to show Sherwood was undercapitalized and operated as an instrument or facade for its parent companies. Additionally, Dr. Wood testified that all reported accounting indicated that Sherwood was consolidated with its parent companies for reporting purposes. Finally, Appellants showed that Sherwood had no employees, and the officers and board members were all involved with Sherwood's parent companies in addition to Sherwood.

Sherwood presented the testimony of Professor John Freeman as its expert. Professor Freeman testified that he believed Sherwood was adequately capitalized and protected by insurance given the nature of its business. In addition, he explained that Sherwood was not established as a sham, but for legitimate business reasons of reducing risk and exposure to liability. He testified there was nothing improper in the way Sherwood was run, the method of reporting and recording Sherwood's activities, or in the manner in which Sherwood operated. With regard to the repayment of the loan to the parent company, Professor Freeman stated, "There's nothing wrong with using some of your cash to pay down your debt. . . . Even if the debt is to your parent corporation."

The master found piercing the corporate veil was the only theory recognized in South Carolina upon which Appellants could receive relief. The court found the alter-ego or instrumentality theory and the amalgamation of interest theory were reserved for specific circumstances, not present in this case. Finally, the master found Appellants failed to demonstrate that Sherwood's corporate veil should equitably be pierced. Accordingly, the master found Sherwood's parent companies were not liable for the judgment against Sherwood.3 This appeal followed.

STANDARD OF REVIEW

"An action to pierce the corporate veil is one in equity. Thus this court may take its own view of the preponderance of the evidence." Dumas v. InfoSafe Corp., 320 S.C. 188, 192, 463 S.E.2d 641, 643 (Ct.App. 1995); see Sturkie v. Sifly, 280 S.C. 453, 456-57, 313 S.E.2d 316, 318 (Ct.App.1984) (finding that...

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