Emergicare Consultants v. Barbara Woolbright ( 2000 )

IN THE COURT OF APPEALS OF TENNESSEE
AT JACKSON
AUGUST 29, 2000 Session
EMERGICARE CONSULTANTS, INC. v. BARBARA A. WOOLBRIGHT,
ET AL.
Direct Appeal from the Chancery Court for Shelby County
No. 109661-3; The Honorable D. J. Alissandratos, Chancellor
No. W1998-00659-COA-R3-CV - Filed December 29, 2000
In this action, Emergicare Consultants, Inc., seeks to pierce the corporate veil of Medic Ambulance
Service, Inc. Emergicare and Medic entered into a contract whereby Emergicare was to manage
Medic. The purpose of the management contract was to streamline Medic in preparation for a sale
to an ambulance consolidator. Emergicare claims that once it delved into the management of Medic,
it discovered several abuses of the corporate form. As a result, Emergicare now seeks to pierce the
corporate veil to impose personal liability on Medic’s president, Barbara Woolbright, in order to
recover $64,000 due under the management contract.
Tenn. R. App. P. 3; Appeal as of Right; Judgment of the Chancery Court Reversed and
Remanded
ALAN E. HIGHERS , J., delivered the opinion of the court, in which DAVID R. FARMER , J., and HOLLY
KIRBY LILLARD , J., joined.
James W. Surprise, for Appellant
Ronald T. Riggs, for Appellee
OPINION
Facts and Procedural History
The appellant, Medic Ambulance Service Inc. (“Medic”), is a corporation whose business
includes performing emergency medical services and emergency medical transportation within
Shelby County, Tennessee. Barbara Woolbright’s husband owned and managed the company before
his death. After his death, Ms. Woolbright took over, and she is the current president of Medic. The
Woolbrights employed several family members at Medic. Mr. and Mrs. Woolbright collectively
owned ninety-nine percent of the shares of Medic ambulance.
On July 2, 1996, the appellant, Emergicare Consultants, Inc. (“Emergicare”), entered into a
contract with the appellee, Medic, in which Emergicare agreed to facilitate a sale of Medic’s assets
to an ambulance consolidator. After the parties realized that the sale of Medic was not immediately
feasible, Emergicare entered into a management agreement with Medic on October 28, 1996, in order
to make Medic a viable product for a later sale. Under the agreement, Emergicare was given
complete managerial control of Medic. Medic was obligated to pay Emergicare $10,000.00 per
month under the terms of the contract, but Medic never paid the monthly fee in full. Medic is now
a defunct corporation. The management agreement is the basis for the debt underlying this case.
When Emergicare began managing Medic, Emergicare claimed to have discovered several
abuses of the corporate form. Emergicare argued that but for the abuses of the corporate form,
Medic would have been able to pay Emergicare the full contract price. In contrast, Medic argued
that Emergicare had knowledge of the abuses of the corporate form and was given broad
management powers to correct the abuses of which it now complains.
At trial, the trial court ruled in favor of Emergicare for $65,000.00 against the corporate
defendant Medic, and he ruled in favor of Defendant Barbara Woolbright, absolving her of any
personal liability for the debt of the corporation.
Standard of Review
Because this case was tried by the court sitting without a jury, we review the case de novo
upon the record with a presumption of correctness of the trial court’s findings of fact. T.R.A.P.
13(d).
Law
The sole issue for our review is whether the actions of the appellee, Ms. Barbara Woolbright,
were sufficient to justify piercing the corporate veil of Medic and imposing personal liability on her.
There is a presumption that a corporation is a distinct legal entity, wholly separate and apart
from its shareholders, officers, directors or affiliated corporations, and the party wishing to negate
the existence of such separate entity has the burden of proving facts sufficient to justify piercing the
corporate veil. See Schlater v. Haynie, 833 S.W.2d, 919, 925 (Tenn. Ct. App. 1991).
The separate identity of a corporation may be disregarded upon a showing that it is a sham
or a dummy or where necessary to accomplish justice. See Oak Ridge Auto Repair Serv. v. City
Finance Co., 425 S.W.2d 620 (Tenn. Ct. App. 1967). In an appropriate case and in furtherance of
the ends of justice, a corporation and the individual or individuals owning all its stock and assets will
be treated as identical. See E.O. Bailey & Co. v. Union Planters Title Guar. Co., 232 S.W.2d 309(Tenn. Ct. App. 1949). However, the principle of piercing the fiction of the corporate veil is to be
applied with great caution and not precipitately, since there is a presumption of corporate regularity.
See 18 Am.Jur.2d Corporations, § 43, nn. 79, 80, 81 (1985).
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Each case involving disregard of the corporate entity must rest upon its special facts.
Generally, no one factor is conclusive in determining whether or not to disregard a corporate entity;
usually a combination of factors is present in a particular case and is relied upon to resolve the issue.
See Schlater v. Haynie, 833 S.W.2d 919 (Tenn. Ct. App. 1991); see also 18 Am.Jur.2d Corporations
§ 48, nn. 41 & 42; 18 C.J.S. Corporations § 9 (1990). Corporate veils are pierced when the
corporation is liable for a debt but it is without funds due to some misconduct on the part of the
officers and directors. See Anderson v. Durbin, 740 S.W.2d 417 (Tenn. Ct. App. 1987).
In Federal Deposit Insurance Corporation v. Allen, 584 F. Supp. 386 (E.D. Tenn. 1984), the
court outlined some factors to be considered in determining whether to pierce the corporate veil. The
factors to be considered are (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. See id. We note
that while the factors listed above are to be considered, no single factor is conclusive. As stated
earlier, the conditions under which the corporate entity will be disregarded vary according to the
circumstances present in each case.
Analysis
In the present case, the appellant cites to several alleged abuses of the corporate form.
Specifically, the appellant emphasizes that:
1) Medic paid two of Mr. Woolbright’s sons as full time employees, even though there is no
evidence that they rendered any noticeable services to the corporation.
2) Mike Woolbright, the son of the late Mr. Woolbright, the owner, misappropriated between
$200,000.00 - $250,000.00 of corporate money, but was never pursued for repayment and
continued to work and draw a full salary plus benefits.
3) Bobby Joe Woolbright, the brother of the late owner of Medic, ceased to actively work in the
company, but continued to draw full benefits and salary.
4) Bobby Joe Woolbright had a lien against him from a Mississippi creditor. In order to protect
him from this lien, the company paid his salary to his wife so that the creditor could not get to his
earnings.
5) Defendant Woolbright put corporate money into a separate bank account in the name of
“MAS” for the purpose of hiding corporate funds from creditors.
6) During this period of time, with the full knowledge of Mrs. Woolbright, the company was
making payroll deductions for taxes, but was not forwarding them to the IRS.
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7) Even though the company was losing its contracts and thus having problems paying creditors,
Mrs. Woolbright took no steps to adjust salaries of family employees who were rendering no
known services or of family members who had stolen substantial assets from the company.
8) Mrs. Woolbright admitted that she would not have treated non-family members in the same
way as family members.
9) The above actions occurred at a time when the company was unable to pay its debts to third
parties.
First, we note the preferential treatment that Mr. and Mrs. Woolbright gave to their family
members. The Woolbrights paid family members who were not rendering any noticeable services
to the corporation. Also, they allowed Mike Woolbright, the son of the late Mr. Woolbright, to
misappropriate between $200,000.00 to $250,000.00 of corporate funds without any repercussions
whatsoever. In addition to not pursuing Mike Woolbright for the stolen money, the Woolbrights
allowed him to continue working at Medic drawing a full salary plus benefits. We find that this is
an abuse of the corporate form, as the Woolbrights were preferring family members over creditors.
As noted earlier, factor number eight from Federal Deposit Insurance Corp. v. Allen, 584 F. Supp.
386 (E.D. Tenn. 1984), states that a corporate veil can be pierced upon “the diversion of corporate
assets by or to a stockholder or other entity to the detriment of creditors.” Id. at 397. We find that
the above actions were a clear diversion of assets that preferred family members to the detriment of
creditors.
Additionally, we find it necessary to mention another instance of preferential treatment to a
family member that was detrimental to a creditor. Bobby Joe Woolbright, the brother of the late
owner of Medic, had a lien against him from a Mississippi creditor. The lien was only against Bobby
Joe Woolbright and not his wife. As a result, in order to protect Bobby Joe from this lien creditor,
Medic paid Bobby Joe’s salary to his wife so that the lien creditor could not get to his earnings.
When asked about the incident at trial, Mrs. Woolbright stated, “[w]ell, they had - - down in
Mississippi, they had some kind of problem with a lien, and it was just against Bob. It wasn’t against
Pat. So we just put the check in her name so that they couldn’t get his check.” We find that this is
a clear abuse of the corporate form, as Medic was once again assisting a family member in the
diversion of assets which resulted in a detriment to a creditor.
We also note the fact that Barbara Woolbright put corporate money into a separate bank
account in the name of “MAS” for the purpose of hiding corporate funds from creditors. At trial,
Ms. Woolbright testified as follows:
Q. Now, Mrs. Woolbright, you did testify in your deposition that you established a
separate bank account in the name of MAS; is that right?
A. Yes.
Q. And into that bank account went corporate funds, did it not?
A. Yes. Well, that’s what the MAS is, Medic Ambulance Service.
Q. Well, you may know that, but if I were looking for a Medic Ambulance Service
account, I certainly wouldn’t be able to find it under MAS, would I?
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A. Well, that was the purpose because a debtor had managed to get - - whatever they
get - - a Court Order to get into my checking account and took $9,000 out for a debt,
and that was $9,000 that was earmarked for the IRS.
Q. So you wanted to hide those corporate assets so they - -
A. From the creditors, yes. . . .
We find that these actions by Medic, in accordance with factor number nine set out above in Allen,
constituted “the use of the corporation as a subterfuge in illegal transactions.” Allen, 584 F. Supp.
at 397.
We also note that Barbara Woolbright and her late husband collectively owned ninety-nine
percent of the stock of Medic Ambulance. Factor number four in Allen is “the sole ownership of
stock by one individual.” Allen, 584 F.Supp. at 397. For all intents and purposes, Mr. and Mrs.
Woolbright had sole control of the corporation. “In an appropriate case and in furtherance of the
ends of justice, a corporation and the individual or individuals owning all its stock and assets will
be treated as identical.” See E.O. Bailey & Co. v. Union Planters Title Guar. Co., 232 S.W.2d 309(Tenn. Ct. App. 1949). Additionally, Ms. Woolbright admitted that she would not have treated non-
family members in the same way as family members. Moreover, all of the above actions occurred
at a time when the company was unable to pay its debts to third parties.
Finally, the court below held that “the Plaintiff was in a position to know or reasonably know
of the circumstances that the Plaintiff now complains about.” (Trial Transcript, pg. 122). Neither
counsels’ briefs nor our own research leads us to any case that is factually similar to the one at bar
regarding the amount of knowledge one can possess about corporate abuses and still pierce the
corporate veil. While appellant may have been aware that Medic employed family members and that
this was not best for the corporation, we find that appellant did not discover, nor was he in a position
to discover, the full extent of the abuses of the corporate form until he had already signed the
management contract and fully delved into the operations of Medic.
The separate identity of a corporation may be disregarded upon a showing that it is a sham
or dummy or where necessary to accomplish justice. See Oak Ridge Auto Repair Serv. v. City
Finance Co., 425 S.W.2d 620 (Tenn. Ct. App. 1967). Corporate veils are pierced when the
corporation is liable for a debt but is without funds due to some misconduct on the part of the
officers and directors. See Anderson v. Durbin, 740 S.W.2d 417 (Tenn. Ct. App. 1987). “Usually,
corporate veils are pierced – that is, the legal entity disregarded and the true owners of the entity held
personally liable – when the corporation is liable for the debt but is without funds due to the
skullduggery or downright fraud on the part of the directors and officers. . . .” See id. at 418. We
hold that, under the unique facts of this case, due to the Woolbrights’ fraud and misconduct in using
the corporation as a mere instrumentality to benefit their family members to the detriment of
creditors, this is a case where justice demands that the corporate form be disregarded.
Conclusion
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Accordingly, for the aforementioned reasons, we hereby reverse and remand to the trial court
for entry of judgment consistent with this opinion to include the defendant Barbara Woolbright.
Costs on appeal are taxed to appellee, Barbara Woolbright, and her surety, for which execution may
issue if necessary.
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ALAN E. HIGHERS, JUDGE
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