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Corporate – Piercing the Veil – Amalgamation of Interests – Manager’s Ownership Accrual

 

The court formally recognizes the amalgamation of interests, or single business enterprise, theory for piercing the corporate veil. However, (1) the trial court overlooked the fact that the corporations in question were S-corporations, which are allowed to overlook corporate formalities; (2) the trial court failed to assign the burden of proof to plaintiff, as the party seeking amalgamation, and (3) the record reveals no evidence of bad faith by the individual defendants. Thus, it was error to consider the three corporate defendants as a single business enterprise.

We reverse the Court of Appeals’ findings as to amalgamation, “de facto partnership,” and the award of 7.2 percent ownership interest in defendant Front Roe Restaurants, Inc., to plaintiff. We affirm as modified the Court of Appeals’ finding that plaintiff is entitled to unpaid shareholder distributions. We vacate the Court of Appeals’ opinion to the extent it makes any findings as to defendants Beachfront Foods, Inc., and LakePoint Restaurants, Inc., the two North Carolina corporations, and we affirm the balance of the judgment of the Court of Appeals pursuant to Rule 220, SCACR.

Facts

The individual defendants created three corporations, each of which owns one of defendants’ three restaurants. Plaintiff managed the restaurants, two in North Carolina and one in South Carolina.

The parties agreed that plaintiff would receive an ownership interest in the corporate defendants, and he did receive a 10 percent interest in the North Carolina restaurants. However, plaintiff’s receipt of a 10 percent ownership interest in the South Carolina corporate defendant – Front Roe Restaurants, Inc. – was conditioned on its restaurant earning a net operating profit of $500,000, which has not occurred.

After plaintiff left defendants’ employ, he sought a 10 percent interest in Front Roe, corporate distributions, and a buyout of his shares. The trial court found that the three corporate defendants had an amalgamation of interests, awarded plaintiff a 7.2 percent interest in Front Roe, awarded him $99,117 in corporate distributions, and ordered a buyout of his shares.

Choice of Law

Veil piercing cases involve disputes that reach beyond the confines of the corporation. Indeed, the threshold issue of amalgamation of interests is not as much a question of the inner-workings of foreign corporations as it is an assessment of whether these entities actually operate as a single business enterprise, and thus should be treated as a single entity. Further, one of the three corporate entities, Front Roe, is a South Carolina corporation; much of the conduct at issue occurred, at least in part, in South Carolina; and plaintiff, the minority shareholder, is a South Carolina resident.

Accordingly, we conclude the application of South Carolina law is appropriate.

Amalgamation/Single Business Enterprise

The parties have not cited, and our research has not found, a decision of this court examining the amalgamation of interests theory in detail. However, in other states, where multiple corporations have unified their business operations and resources to achieve a common business purpose and where adherence to the fiction of separate corporate identities would defeat justice, courts have refused to recognize the corporations’ separateness, instead regarding them as a single enterprise-in-fact, to the extent the specific facts of a particular situation warrant.

Today, we formally recognize this single business enterprise theory. The single business enterprise theory requires a showing of bad faith, abuse, fraud, wrongdoing, or injustice resulting from the blurring of the entities’ legal distinctions.

Here, the trial court found amalgamation was proper because the three entities had the same shareholders and the same managing partner (plaintiff) who oversaw all three restaurants. The trial court also found “there had been considerable movement of corporate funds between the three corporate Defendants, for which Defendants did not produce any documentation in the record of this case,” and noted the three restaurants shared a website. The trial court also found the parties had disregarded corporate formalities and conveyed a boat from the individual defendants to plaintiff “without any corporate formality . . . to avoid liability and high insurance premiums.”

The trial court’s finding was one of amalgamation, despite its use of the phrase “de facto partnership,” and we reverse the Court of Appeals as to that issue.

Further, we find the trial court’s analysis not only failed to assign the burden of proof to plaintiff, as the party seeking amalgamation, but also overlooked the corporations’ status as S-Corporations, which are statutorily permitted to disregard the very corporate formalities identified by the trial court as lacking. And the record includes no evidence of bad faith by the individual defendants. Thus, it was error to consider these three distinct corporations as a single business enterprise.

Properly viewing these corporations as the three distinct entities they are, we conclude that the internal affairs doctrine precludes consideration of any remaining issues as to the North Carolina corporations. We therefore reverse the decision of the Court of Appeals, and we vacate the trial court’s decisions as they relate to Beachfront and Lake Point.

Further, we affirm the finding that plaintiff is entitled to unpaid distributions from Front Roe, but we modify the amount awarded to $14,142, which removes the funds attributable to the North Carolina corporations.

Front Roe Shares

Plaintiff was granted a one percent interest when Front Roe turned a profit, and the parties’ original agreement provided that he would receive an additional nine percent when the company had a net operating profit of $500,000. Plaintiff did not show that Front Roe ever achieved a net operating profit of $500,000 or that the parties altered the original agreement.

Plaintiff’s ownership share in Front Roe is therefore one percent. The trial court determined the fair market value of Front Roe is $1,376,000. Accordingly, the cost of purchasing plaintiff’s shares in Front Roe is $13,760. We affirm the balance of the Court of Appeals’ decision pursuant to Rule 220, SCACR.

Affirmed in part, affirmed as modified in part, vacated in part, and reversed in part.

Dissent

(Hearn, J.) I would remand to the trial court to analyze the evidence under the single-enterprise framework we established today and to make findings of fact on that issue.

Pertuis v. Front Roe Restaurants, Inc. (Lawyers Weekly No. 010-074-18, 18 pp.) (John Kittredge, Acting Chief Justice) (Kaye Hearn, J., concurring in part & dissenting in part) Appealed from the Circuit Court in Greenville County (Edward Miller, J.) On writ of certiorari to the Court of Appeals. Blake Hewitt and Curtis Stodghill for Petitioners; Robert Wilson Jr. for Respondent. S.C. S. Ct.

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