David Canter v. Richard Ebersole

IN THE COURT OF APPEALS OF TENNESSEE

AT KNOXVILLE

April 5, 2006 Session

DAVID CANTER v. RICHARD EBERSOLE

Direct Appeal from the Chancery Court for Hamilton County

No. 04-0585 Hon. W. Frank Brown, III., Chancellor

No. E2005-02388-COA-R3-CV - FILED MAY 13, 2006

Plaintiff brought an action in the Chancery Court to pierce the corporate veil to reach assets of a

member to satisfy a judgment against the corporation. The Chancellor refused the request and

dismissed the action. On appeal, we affirm.

Tenn. R. App. P.3 Appeal as of Right; Judgment of the Chancery Court Affirmed.

HERSCHEL PICKENS FRANKS, P.J., delivered the opinion of the court, in which D. MICHAEL SWINEY ,

J., and SHARON G. LEE, J., joined.

Michael A. Anderson, Chattanooga, Tennessee, for appellant.

John P. Konvalinka, Chattanooga, Tennessee, for appellee.

OPINION

In this action the plaintiff asked the Chancellor to pierce the corporate veil of

Windward Pointe Townhomes, LLC (“WPT”).

Richard Ebersole and Dale Mabee organized WPT on July 17, 1998 for the purpose

of constructing and selling eight town homes near Lake Chickamauga in the Chattanooga area.1

Ebersole became the sole member after Mabee withdrew from WPT in April 2001. WPT had an

initial capitalization of $1,000.00, and First Tennessee Bank provided over three million dollars in

1

WPT was organized pursuant to Tenn. Code Ann. §§ 48-203-101, 48-205-101.

financing pursuant to a loan, which Ebersole personally guaranteed.2

On November 2, 1998, WPT entered into a sales contract with the plaintiff for the

purchase of one of the town homes. According to Ebersole, the agreed purchase price was

$525,000.00, and pursuant to the contact, Canter paid a $25,000.00 deposit for the town home and

installed heat and air units in all eight town homes via his company, Retail Air Systems, LLC

(“Retail Air”). In exchange for the installation of the heat and air units, Canter was to receive a

credit of $42,515.79 against the purchase price at closing. At some point in 2002, plaintiff informed

WPT that he did not intend to close the sale. In December 2002, WPT sold this town home to

another buyer for less than the original contract price, and filed suit against Retail Air and plaintiff

for the breach of the contract, and Retail Air and plaintiff filed a counter-claim for the same.3 On

September 25, 2003, the Chancery Court entered a judgment dismissing WPT’s complaint and

awarding Canter $67,515.79 against WPT.4

Plaintiff’s Complaint averred that WPT failed and refused to pay the judgment and

that Ebersole exercised his personal dominion and control over WPT to defraud plaintiff. The

Complaint argued that Ebersole should be held personally liable to pay the judgment, post-judgment

interest, and costs. After trial, the Chancellor ruled that the evidence did not support piercing the

corporate veil, and dismissed the Complaint with prejudice.5

This case is subject to de novo review based upon the record of the proceedings

below. Keaton v. Hancock County Bd. of Educ., 119 S.W.3d 218, 222 (Tenn. Ct. App. 2003). We

will presume that the trial court’s findings of fact are correct, unless the evidence preponderates to

the contrary. Tenn. R. App. P. 13(d); Union Carbide Corp. v. Huddleston, 854 S.W.2d 87, 91 (Tenn.

2

WPT defaulted on this loan in the summer of 2002, and Ebersole used his personal funds

to make payments directly to First Tennessee Bank pursuant to the guaranty.

3

WPT did not have sufficient funds to pay for legal fees; thus, Mr Ebersole paid the legal fees

personally. Prior to this litigation, the Secretary of State administratively dissolved WPT for failure

to file its annual report for 2000. This administrative dissolution occurred on March 16, 2001. The

Secretary of State reinstated WPT on February 25, 2004.

4

The Chancery Court reasoned that WPT breached the contract first by delaying completion

of Mr. Canter’s town home until June 2001.

5

Neither shareholders of a corporation nor members of a limited liability company are

personally liable for the acts or debts of the entity. Tenn. Code Ann. §§ 48-16-203(b), 48-217-

101(a)(1) (2005). In addition, both corporations and limited liability companies are empowered “as

an individual to do all things necessary or convenient to carry out its business.” Tenn. Code Ann.

§§ 48-13-102, 48-212-101 (2005). In addition, this Court has affirmed application of veil piercing

to disregard the existence of an LLC. Chopra v. U.S. Prof’ls, LLC., No. CT-004949-00, 2005 WL

280346, at *4 (Tenn. Ct. App. Feb. 2, 2005).

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1993). This presumption of correctness, however, does not apply to the trial court’s conclusions of

law. Keaton, 119 S.W.3d at 222.

The piercing of a corporate veil is applied in extreme circumstances, and no single

factor may form a basis for piercing the corporate veil. Piercing the corporate veil is an equitable

doctrine to prevent the use of a corporate entity to defraud or perform illegal acts. See, Schlater v.

Haynie, 833 S.W.2d 919, 925 (Tenn. Ct. App. 1991); Oak Ridge Auto Repair Service v. City Finance

Co., 425 S.W.2d 620, 622 (Tenn. Ct. App. 1967); Muroll Gesellschaft M.B.H. v. Tenn. Tape, Inc.,

908 S.W.2d 211, 213 (Tenn. Ct. App. 1995). The legal entity should not be disregarded

precipitately, but with great caution. Schlater, 833 S.W.2d at 925.

“The determination of whether to disregard the corporate fiction depends on the

special circumstances of each case, and ‘the matter is particularly within the province of the trial

court.’” Oceanics Schools, Inc. v. Barbour, 112 S.W.3d 135, 140 (Tenn. Ct. App. 2003) (quoting

Electric Power Bd. of Chattanooga v. St. Joseph Valley Structural Steel Corp., 691 S.W.2d 522, 256

(Tenn. 1985)).

“Factors to be considered in determining whether to disregard the corporate veil

include not only whether the entity has been used to work a fraud or injustice in

contravention of public policy, but also: (1) whether there was a failure to collect

paid in capital; (2) whether the corporation was grossly undercapitalized; (3) the

nonissuance of stock certificates; (4) the sole ownership of stock by one individual;

(5) the use of the same office or business location; (6) the employment of the same

employees or attorneys; (7) the use of the corporation as an instrumentality or

business conduit for an individual or another corporation; (8) the diversion of

corporate assets by or to a stockholder or other entity to the detriment of creditors,

or the manipulation of assets and liabilities in another; (9) the use of the corporation

as a subterfuge in illegal transactions; (10) the formation and use of the corporation

to transfer to it the existing liability of another person or entity; and (11) the failure

to maintain arms length relationships among related entities.”

Id. (quoting Federal Deposit Ins. Corp. v. Allen, 584 F.Supp. 386, 397 (E.D. Tenn.1984)). The party

requesting that the corporate entity be disregarded has the burden of presenting facts demonstrating

the need for such relief. Id. No one factor is conclusive. Id.

Plaintiff argues there are several factors to justify disregarding the separate existence

of WPT. He cites the fact that the Secretary of State administratively dissolved WPT prior to the

entity’s suit against Canter, and reinstatement was not made until after plaintiff was awarded the

judgment at issue in this case. At trial, Ebersole testified he intended to dissolve WPT after this

litigation is concluded. These facts are irrelevant, however, because an LLC member’s right to

limited liability “continues in full force regardless of any dissolution, winding up, and termination

of an LLC.” Tenn. Code Ann. § 48-217-101(b) (2005).

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Plaintiff also stresses that Ebersole failed to follow usual company formalities. For

example, Ebersole contended that by informally discussing business with his former partner, Mabee,

any requirements for formal meetings and resolutions were satisfied. On March 16, 2001, the

Secretary of State administratively dissolved WPT for failure to file its annual report for 2000. In

addition, WPT received numerous loans from Ebersole and other entities controlled by Ebersole.

There were no formal promissory notes documenting these interest free loans, only notations in the

entities’ accounting records. These facts are also irrelevant because an LLC’s failure to follow usual

company formalities “is not a ground for imposing personal liability on the members . . . of the

LLC.” Tenn. Code Ann. § 48-217-101(e) (2005).

Plaintiff asserts that WPT was grossly undercapitalized, as the initial capitalization

was only $1,000.00 for a multi-million dollar project. Soon after its formation, WPT received $3.2

million in financing from First Tennessee Bank, and Ebersole personally guaranteed this loan. WPT

also received one million dollars in additional loans from Ebersole and entities owned by him. The

Chancellor rejected this argument thusly:

Mr. Ebersole testified that the initial capital of WPT was $1,000.00.

However, he and Mr. Mabee and companies they controlled made loans to WPT as

needed. Most important, the members had estimated the costs of the project and

agreed to borrow sufficient funds from First Tennessee Bank to build the townhomes.

Unfortunately for Mr. Ebersole, there was an increase in costs and expenses and two

townhomes did not sell as expected. The anticipated profit did not occur.

Mr. Canter points to Mr. Ebersole’s personal payment of some of WPT’s

debts. Therefore, Mr. Canter argues that Mr. Ebersole should be liable for all debts

of WPT. Mr. Ebersole testified, without contradiction, that he only paid those

obligations of WPT for which he also was personally liable. For example, he

executed a personal guarantee to First Tennessee Bank. He had paid some of his

personal monies to First Tennessee Bank when WPT did not have the funds to make

payment. His alternatives were to loan funds to WPT, so WPT could make the

payment, or let the bank sue him. His direct payment to the bank was reasonable and

permissible. This case is an example why creditors want a personal guarantee and/or

adequate security for a loan.

Plaintiff also argued that Ebersole dominated WPT. After the withdrawal of Mabee,

Ebersole had sole ownership and control of WPT, and had exclusive authority to write checks on

WPT’s account and to borrow funds on its behalf. He operated WPT from his home and used his

personal cell phone for WPT business. While these facts indicate dominance, the evidence does not

establish that Ebersole used his dominance to defraud or conduct an illegal operation.

Finally, Canter argues Ebersole’s management of WPT’s debts is another factor

weighing in favor of veil piercing the corporate veil, and points to the repayment of debts to creditors

other than Canter. The Chancellor concluded that Ebersole’s payment of debts by the corporation,

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where Ebersole was personally liable did not establish an ulterior motive to defraud creditors,

especially as to debts that Ebersole personally guaranteed. Canter also points to the fact that WPT

used its last $20,000.00 in assets to partially repay its debts to Ebersole. The record shows that

Ebersole loaned WPT $369,556.99 and received total reimbursements of $146,697.07. The

Chancellor, in refusing to pierce the corporate veil said:

. . . Mr. Ebersole treated the entities as separate from himself. He documented loans

to the LLCs and kept records of the transactions of the companies. Nothing in the

record indicates that Mr. Ebersole used the LLCs to accomplish any unlawful acts.

In addition, there is nothing in the record that indicates that Mr. Ebersole diverted any

assets of WPT to prevent Mr. Canter from collecting the judgment. In sum, Mr.

Canter has given the court no reason to find that the equitable relief of piercing the

LLC veil is proper in this case. There was no injustice or wrongdoing shown which

would require personal liability on Mr. Ebersole’s behalf. Unfortunately, not every

person gets paid for his goods and/or services.

The evidence does not preponderate against the Trial Court’s findings of fact. Tenn.

R. App. P. 13(d). We affirm the Judgment of the Trial Court and remand, with the cost of the appeal

assessed to David Canter.

______________________________

HERSCHEL PICKENS FRANKS, P.J.

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