540 F.2d 681 (4th Cir. 1976)
In 1962 W. Ray Flemming, his wife, and his attorney formed W. Ray Flemming Fruit Co. as a South Carolina corporation with 5,000 shares issued for one dollar each; after approximately 2,000 shares were retired, Flemming owned roughly 90 percent of the remaining stock.12
The corporation acted as a commission agent, selling peaches and watermelons for Edgefield-area growers and collecting the sale price less transportation costs and its commission before remitting the balance to the growers.3
The District Court found that the corporation never had a stockholders’ meeting.45 There were no corporate records of a real directors’ meeting in all the years of the corporation’s existence.6 The sole nominal director, Ed Bernstein, attended none and received no salary, fees, or expense reimbursement.7 Flemming alone received funds from the corporation, withdrawing between $15,000 and $25,000 annually even in years when the corporation reported no profit and possessed no working capital.8 No other stockholder or officer ever received a dividend, salary, or fee.9
DeWitt Truck Brokers, Inc. performed transportation services for the corporation's shipments.10 After experiencing payment delays, DeWitt was told by Flemming that he would personally pay the charges if the corporation did not.11 The corporation nevertheless retained the transportation charges it had collected from growers and failed to remit them to DeWitt.12 The corporate defendant conceded it was not responsive to judgment.13
DeWitt sued both the corporation and Flemming individually in the District Court. After trial the District Court made findings of fact and pierced the corporate veil, entering judgment against Flemming personally. Flemming appealed to the United States Court of Appeals for the Fourth Circuit.14
Whether proof of fraud is required before a court may pierce the corporate veil under South Carolina law?15
Proof of plain fraud is not a necessary element in a finding to disregard the corporate entity.16 An obvious inadequacy of capital, measured by the nature and magnitude of the corporate undertaking, has frequently been an important factor in cases denying stockholders their defense of limited liability.17 Although there is no doubt that fraud is a proper matter of concern in suits to disregard corporate fictions, it is not a prerequisite to such a result, especially when there is gross undercapitalization or complete domination of the corporate entity under scrutiny.18 The theory of liability under the instrumentality doctrine does not rest upon intent to defraud. It is an equitable doctrine that places the burden of the loss upon the party who should be responsible.19 South Carolina law is in accord with the general rule that fraud is not a necessary predicate for piercing the corporate veil, as the corporate fiction must be applied to promote justice rather than defeat it.20
No. The District Court pierced the corporate veil and imposed individual liability on Flemming without any finding of fraud after making findings of fact that may be overturned only if clearly erroneous.21 The corporation was formed in 1962 with 5,000 shares issued for one dollar each.22 After approximately 2,000 shares were retired, Flemming owned roughly 90 percent of the remaining stock. The corporation acted as a commission agent selling produce for growers and collecting sale prices less transportation costs and its commission.23
The District Court found that the corporation never had a stockholders’ meeting. There were no corporate records of a real directors’ meeting in all the years of the corporation’s existence. The sole nominal director attended none and received no salary, fees, or expense reimbursement.24 Flemming alone received funds from the corporation, withdrawing between $15,000 and $25,000 annually even in years when the corporation reported no profit and possessed no working capital. No other stockholder or officer ever received a dividend, salary, or fee.
These facts establish gross undercapitalization combined with complete domination by Flemming and operation solely for his benefit, satisfying the rule elements of inadequate capital and fundamental unfairness without any requirement of fraud.25
Proof of fraud is not required before a court may pierce the corporate veil under South Carolina law when other factors such as gross undercapitalization and domination establish fundamental unfairness.26
Whether the District Court's findings that the corporation was undercapitalized, failed to observe corporate formalities, and operated solely for the benefit of its dominant stockholder were clearly erroneous?27
The circumstances which justify disregarding the corporate fiction necessarily vary according to the circumstances of each case.28 Every case is to be regarded as sui generis to be decided in accordance with its own underlying facts.29 Since the issue is one of fact, its resolution is particularly within the province of the trial court.30 Such resolution will be regarded as presumptively correct and will be left undisturbed on appeal unless it is clearly erroneous.31 The conclusion to disregard the corporate entity must involve multiple factors.32 These include undercapitalization, failure to observe corporate formalities, nonpayment of dividends, insolvency of the debtor corporation, siphoning of funds by the dominant stockholder, nonfunctioning of other officers or directors, absence of corporate records, and operation as a facade for the dominant stockholder.33 It must present an element of injustice or fundamental unfairness.34
No. The District Court found that the corporation was undercapitalized, failed to observe corporate formalities, and operated solely for the benefit of its dominant stockholder. These findings are not clearly erroneous. The corporation began with minimal capitalization of five thousand dollars.35 That amount was later reduced by retirement of shares to approximately three thousand dollars.36 This amount had been exhausted by years of operation at no profit with no working capital.37 The corporation never had a stockholders’ meeting. There were no corporate records of a real directors’ meeting in all the years of the corporation’s existence. Bernstein was a figurehead director who attended no meetings and received no compensation of any kind.38
Flemming alone received all funds from the corporation in the form of annual withdrawals of fifteen thousand to twenty-five thousand dollars even when the corporation showed no profit.39 No other stockholder or officer ever received any dividend, salary, or fee.40 The corporation operated on transportation charges collected from growers but not remitted to DeWitt while Flemming withdrew equivalent sums.41 These multiple factors blend to show undercapitalization, disregard of formalities, and operation exclusively for Flemming's benefit.42 They present basic unfairness that supports the District Court's findings.43
The District Court's findings that the corporation was undercapitalized, failed to observe corporate formalities, and operated solely for the benefit of its dominant stockholder were not clearly erroneous.44
Whether a personal assurance given by the dominant stockholder to a creditor supports piercing the corporate veil to impose individual liability?45
When one, who is the sole beneficiary of a corporation's operations and who dominates it, induces a creditor to extend credit to the corporation on a personal assurance that he will take care of the charges if the corporation fails to do so, that fact has been considered by many authorities sufficient basis for piercing the corporate veil. Where the promisor owns substantially all the stock of the corporation and seeks by his promise to serve his personal pecuniary advantage, the question whether such promise is within the statute of frauds is a fact question to be resolved by the trial court.46 The promise may be treated as original and without the statute when given at the time or before the debt is created.47
Yes. After experiencing payment delays, DeWitt was told by Flemming that he would personally pay the charges if the corporation did not. On this assurance DeWitt continued to haul for the corporation.48 The corporation nevertheless retained the transportation charges it had collected from growers and failed to remit them to DeWitt. Flemming was the sole beneficiary of the corporation's operations and dominated it completely, making all corporate decisions and receiving all withdrawals.49
The existence of this promise by Flemming is not disputed.50 This assurance was given for the obvious purpose of promoting the individual advantage of Flemming, who alone could profit from the continued operation of the corporation.51 The personal assurance given by the dominant stockholder to the creditor therefore supports piercing the corporate veil to impose individual liability on Flemming.52
A personal assurance given by the dominant stockholder to a creditor supports piercing the corporate veil to impose individual liability.53