Hunting v. Elders
359 S.C. 217, 2004 S.C. App. LEXIS 107, 597 S.E.2d 803 (2004)
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Rule of Law:
A court may pierce the corporate veil to hold a dominant shareholder personally liable for corporate debts if the shareholder abused the corporate form by, among other things, grossly undercapitalizing the corporation and siphoning its funds, and if recognizing the corporate entity would result in fundamental unfairness to a third party.
Facts:
- William Elders reinstated a dormant corporation, Elmyer Enterprises, Inc., in 1993 to operate two bars he owned.
- Each bar was initially capitalized with only $1,000.
- Elders leased property, equipment, and video poker machines to Elmyer Enterprises from other corporations he also owned and controlled.
- Elders appointed his niece as secretary and treasurer, but she testified she was unaware of her position or stock ownership and never attended any corporate meetings.
- A forensic accountant determined that over a three-year period, Elders siphoned between $400,000 and $800,000 from Elmyer Enterprises for his personal use, leaving insufficient records to conduct a full audit.
- Chris Gordon became visibly intoxicated at one of Elmyer Enterprises' bars, Willie's, where employees continued to serve him alcohol.
- After leaving the bar, Gordon caused a vehicle accident that resulted in permanent brain damage to Catherine L. Hitchcock.
Procedural Posture:
- Carol Hunting, as guardian for Catherine Hitchcock, sued Chris Gordon, Elmyer Enterprises, Inc., and William Elders in a state trial court.
- The trial was bifurcated; in the first phase, a jury awarded Hitchcock $1.5 million in actual damages against Gordon and Elmyer Enterprises.
- The second phase was a non-jury trial to determine if the corporate veil of Elmyer Enterprises should be pierced to hold Elders personally liable.
- The trial court found that Elders was the alter ego of the corporation, pierced the corporate veil, and held him personally liable for the $1.5 million judgment and accrued interest.
- William Elders, as appellant, appealed the trial court's decision to the Court of Appeals of South Carolina. Carol Hunting is the appellee.
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Issue:
Does a dominant shareholder's operation of a corporation as a mere facade, characterized by gross undercapitalization, siphoning of funds, and a lack of corporate formalities, justify piercing the corporate veil to hold the shareholder personally liable for a tort judgment against the corporation?
Opinions:
Majority - Stilwell, J.
Yes. A court may pierce the corporate veil and hold a shareholder personally liable when the evidence shows the corporation was operated as a mere facade for the dominant shareholder and that recognizing the corporate form would promote injustice. The court applied the two-pronged test from 'Sturkie v. Sifly'. The first prong was met because a sufficient number of the eight factors indicated a disregard for the corporate entity, most significantly the gross undercapitalization of an inherently risky business, the substantial siphoning of corporate funds by Elders, and the fact that the corporation was merely a facade for Elders' operations. While the company's status as a statutory close corporation lessened the importance of some formalities, the combined evidence of abuse was overwhelming. The second prong, fundamental unfairness, was met because Elders was aware of Hitchcock's claim yet acted in a self-serving manner by continuing to drain the company's assets, effectively leaving it unable to satisfy the judgment. Therefore, piercing the corporate veil was necessary to prevent injustice.
Analysis:
This case clarifies how the traditional veil-piercing doctrine applies to modern corporate forms like statutory close corporations and S corporations. The court's analysis demonstrates that while statutes may relax requirements for certain formalities (e.g., board meetings, bylaws), they do not shield shareholders from liability for fundamental abuses like gross undercapitalization and siphoning of funds. The decision reinforces that limited liability is a privilege contingent on maintaining a true separation between the shareholder and the corporation. It sets a precedent that in high-risk industries, such as serving alcohol, undercapitalization will be heavily scrutinized as a key factor in determining whether to pierce the corporate veil to compensate a tort victim.
