Boles v. National Development Co., Inc.
175 S.W.3d 226, 2005 Tenn. App. LEXIS 247, 2005 WL 975358 (2005)
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Rule of Law:
Under Tennessee law, a court may pierce the corporate veil to hold a controlling individual personally liable for a corporation's debts when that individual exercises complete dominion over the corporation, uses it as a mere instrumentality for personal benefit, and diverts its assets, rendering it insolvent to the detriment of creditors. A court can also exercise personal jurisdiction over such a non-resident individual by attributing the corporation's contacts with the forum state to the individual as its alter ego.
Facts:
- National Development Company, Inc. (National), a residential developer, sold 3,876 lots in its Hidden Valley Lakes Development.
- The purchase contracts obligated National to construct various amenities, including a thirty-acre centerpiece lake called Crystal Lake.
- National failed to construct a functional lake; it could not hold water and became a thirty-acre hole in the ground.
- Clyde W. Engle was the principal who exercised control over National and its parent corporation, Sunstates.
- While litigation was pending, National transferred over $5 million of its assets, including a $2.4 million unsecured note payable from its parent company, Sunstates.
- Engle used corporate funds to purchase approximately $1.9 million in art and jewelry which was kept at his home, as well as a Rolls Royce.
- Millions of dollars were funneled from the corporations up the chain to Engle personally, and the corporations under his control became insolvent.
Procedural Posture:
- Property owners filed a class-action lawsuit in a Tennessee trial court against National Development Company, Inc. (National) for breach of contract.
- The plaintiffs amended their complaint to add National’s parent, Sunstates Corporation, and later its principal, Clyde W. Engle, as defendants, alleging they were alter egos of National.
- The trial was bifurcated. In the first phase, the trial court found National liable for breach of contract and awarded plaintiffs a judgment of $2,540,867.
- In the second phase, the trial court found Engle was the alter ego of the corporate entities and held him personally liable for the judgment against National.
- The defendants, National and Engle, appealed the trial court's judgment to the Court of Appeals of Tennessee.
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Issue:
Under Tennessee law, does an individual who exercises complete dominion and control over a corporation, diverts its assets for personal benefit, and causes it to become insolvent to the detriment of creditors, become the corporation's alter ego, thereby making him personally liable for its debts and subject to personal jurisdiction in the state?
Opinions:
Majority - Clement, Jr., J.
Yes. An individual who exercises complete dominion over a corporation and uses it as a mere instrumentality to divert assets for personal gain, rendering it insolvent, is the alter ego of the corporation and is personally liable for its debts and subject to personal jurisdiction. The court affirmed that Tennessee law, rather than the law of the state of incorporation, applies when determining whether to pierce the corporate veil to enforce a Tennessee judgment. The evidence, including facts established as a sanction for Engle's obstruction of discovery, overwhelmingly showed that Engle exercised complete dominion over National and Sunstates. He treated the corporations as his personal instruments, diverted millions in assets for his own benefit, and rendered them insolvent. This conduct satisfied the factors for piercing the corporate veil under the alter ego doctrine. Because Engle was National's alter ego, National's business activities in Tennessee were attributable to him, establishing personal jurisdiction.
Analysis:
This case solidifies the application of Tennessee law for piercing the veil of foreign corporations in actions to enforce Tennessee judgments, preventing defendants from sheltering behind potentially more restrictive laws of their incorporation state. It reinforces the multi-factor 'Allen test' for the alter ego doctrine, emphasizing that control combined with injustice—such as draining corporate assets to defraud creditors—is sufficient for personal liability. The decision also provides a clear link between a successful alter ego claim and establishing personal jurisdiction over a non-resident principal, confirming that the corporation's contacts with the forum can be imputed to the individual who is its 'other self'.
