# FILED

June 26, 1998 Cecil Crowson, Jr. Appellate C ourt Clerk IN THE COURT OF APPEALS OF TENNESSEE AT KNOXVILLE

JUDD’S INCORPORATED, ) COCKE CHANCERY ) Plaintiff/Appellee ) NO. 03A01-980 1-CH-00002 ) v. ) HON. CHESTER RAIN WATER, JR. ) CHANCELLOR ) DORIS L. MU

IR and husband ) ALLAN T. MUIR, ) ) Defendants/Appel

lants ) and ) ) HOLLADAY-TYLER PRINTING, ) INC., ) AFFIRMED ) AS MODIFI

ED and Defendants/Appellees ) REMANDED

Richard Baker, Knoxville, for Appellants, Doris L. Muir and Allan T. Muir. James H. Ripley, Sevierville, for Appellee, Judd’s Inc. Edward H. Ha

milton, Dougla

s S. Yates, Jose

ph P. Stapleton, S evierville, for Appellee Holladay-Tyler Printing, Inc.

O P I N I O N

INMAN, Senio

r Judge Muir Publishing Com

pany, Ltd.,

Inc. [Muir Tenn

essee]. sitused

in Cocke County, Tennessee, published a log home magazine. After Muir Tennessee bankrupted, two of its creditors filed this action against D

oris L. Muir, Pr

esident and COO of the corporation, and her husband, Allan T. Muir, sole stockholder of the corporation, to recover substantial amounts owing to each creditor, alleging that the Muirs were personally liable under the alter ego doctrine and1 Holladay-Tyler, a cross-plaintiff, is treated as an original plaintiff in this opinion. 2 that the corporate charter should be dis regarded in order to onerate its Pres ident and sole shareholder

with liability f

or the debts. 1 The Chancellor he

ld that the ‘corpor

ate veil should be pier

ced’ because the Muirs engaged in an extended and extensive scheme to defraud creditors through manipulat

ive corporate sche

mes. He m

ade exhaustive findin

gs of fact, with which we fully concur, and allowed a recovery against the Muirs. Pre

judgment inter

est and attorney

fees were denie

d. The Muirs appea

l, insisting that they cannot be held liable for the debts of the corporation. The creditors appeal from th

e disallowance of pre-judgment interest and attorn

ey fees. We affirm

the judgment a

gainst the Muirs for the open accounts. T he judgment is m

odified to allow pre

-judgment inte

rest as provided for

by T.C.A.

§ 47-14-123 beginning De

cember 1, 1993 , as to each plainti ff, and the case i s remanded to the

trial Court for a d

etermination a

nd assessment of

attorney fees , and for all other ap

propriate purposes. Our review of the

findings of fact ma

de by the trial Court

is de novo upon the record of the tr

ial Court, accompanied by a presumption of the correctnes s of the finding, unless the preponderance of the evidence is otherwise. T ENN . R. A PP . P., R ULE 13(d).. R. A PP . P., R ULE 13(d); Campbell v. Florida S teel Corp., 919 S.W.2d 26 (Te

nn. 1996). Where there is no conflict in the evidence as to any material fact, the question on appeal is one of law, and the scope of review is de novo with no presumption of correctness accompanying a chancellor's conclusions of la w. Union Carbide Corp. v . Huddleston, 854 S.W.2d 87 (Te nn. 1993)

.

I3 The defendants fir

st published their log hom e magazine in 1 977. Their company wa

s incorporated in Ca

nada as Muir Publishi

ng Company,

Ltd. (“Muir Canada”), of w

hich they were

the sole shareholder

s. Doris Muir wa

s the president. It is not

disputed that she and he

r husband exercised complete dominion and contr

ol over all the aff

airs of the corpora

tion. In 1985, Doris Muir

negotiated a contra

ct with the ICD H

earst Corporation (“Hearst”) to distribute and collect revenue from newsstand sales of magazines pr

oduced by Muir Ca

nada. The contra

ct, which provided

that all newsstand revenues

would be paid to Muir Canada, was for a period of six years and term

inated in 1991. In the

interim, Muir

Canada had incurre

d a heavy debt to its Canadian printer known as “Ronalds”. In 1987, the defenda

nts obtained a Tenne ssee charter for Muir Publishing Company L

imited, Inc.(“Muir Tennessee”) and by 1990 they had transf erred all publishing activities f

rom Muir Cana

da to Muir Tennesse

e, although Muir Canada still owed its printer, Ronalds, approximately $400,000.00 in Canadian dollars. Notwithstanding this debt, Doris Muir directed that the revenues fr om Hearst which we

re owing to Muir Ca

nada should be rem

itted to Muir Tennessee. In a

ddition, she had Muir T

ennessee assum

e the Muir Canada de

bt to Ronalds comple

tely without cons

ideration. In the mid 1980's , the Muirs began ac cumulating a subs

tantial amount of real est ate in C osby, Ten nessee , title to whic h they to ok ind ividu ally, notwithstanding that this real estate and a host of improvements were financed solely by Muir Tennessee and advertising credits to suppliers. When questioned as to wheth

er he or his wife h

ad paid any am

ount from their individual funds for the

construction of any

of the improvem

ents upon the4

property, Mr.

Muir responded, “

not that I can reca

ll, no.” In a m

agazine editorial he more expansively explained the extent to which he and his wife were enriched a

t the expense of Muir

Tennessee. The

editorial was iron

ically entitled “The Inside Story”: “When we first started buildi

ng the information center Bankers were not a problem. W

e had it nicely worked out that we could financeit entirely from the cash

flow of Log Home Guide. By the time this cash flow loan f rom Log Home Guide reached a quarter

of a million

dollar investment,

however, and Dor

is, stimulated

by the sight of the Peace Chapel and the shell of the C enter rising ma

ssively above the

ground, had laid more plans for the acquisition of new land and more buildings, there were rum blings from

our Banker in

Canada. He had become awar

e of a vast transfe

r of funds from

Canada to the United States, and quiet unreasonable [sic] from Doris’s view point, wanted to know what was going

on . . . Don’t get m

e wrong. I have no

thing against the Information Center being nonprofit. It is just tha t I didn’t like the way Log Home Guide was becoming nonprofit too the wa y the cash was pouring out.” When asked to review thi s editorial for accurac y, he responded, “Yeah, I would say it’s probably abso lutely accurate.” In early 1990, the defendants contracted with the plaintiff Holladay-Tyler Publishing Company, Inc. (“Holladay -Tyler”) to publish the magazines produced by Muir Tennessee. By late summ er of 1993, Muir Tennessee was unable to pay its de

bt to Holladay-Tyler, whi ch required the Muir

s to sign a note agreeing to a pa

yment sche

dule as a condition to a

continued business relationship. Muir Tennessee made one $20,000.00 payment on the note before it defa ulted a nd sou ght ano ther pr inter. T here was then ow ing to Hollad ayTyler $318,896 .65 in principal debt exclusive of intere st and attorney’ s fees. Muir Tennessee then contracted with the plaintiff Judd’s Incorporated (“Judd’s) to p rint its p ublicati ons. Begin ning in Oct ober, 1993 , Judd’s agreement to p

rint the magaz

ines was based on a c

redit application pr

ovided to it and signed by the

defendant, Doris

Muir. Relying

on this credit applic ation,2 Pronounced, as the briefs explain, by Mrs. Muir as ‘ass-ets’, a double entendre

susceptible of a facile understanding. 5 Judd’s printed m

agazines for Muir T

ennessee which inc

urred an indebtednes s to Judd’s in the princi pal amount of $78,777.6 5. In 1990, and during the

accumulation of

this debt, the defe

ndants relocated to the Cayman Island s, where they formed another company, known as Muir’s Origi

nal Inc. (“M

uir Cayma

n”). As with Muir

Tennessee, All

an Muir was the sole share

holder and Doris Muir

was president of M

uir Cayma

n. In 1991, Muir Cayman began receiving checks from Muir Tennessee, twice monthly , for what the def endants called “

consulting fees”. T

hese consulting fees initia

lly were $10, 000.00 per month a nd eventually inc

reased to $15,000.00 per month. From 1991 through the end of fiscal year 1994, a total of $511,900.00 in such f

ees was paid to Muir

Cayman by

Muir Tennessee to the detriment of th

e creditors of Muir

Tennessee who we

re not being paid. When Holladay

-Tyler rea lized that it was not

going to be paid by M

uir Tennessee for its printing services, it filed suit against Muir Tennessee, which impelled the defendants to take action to “protect their assets”. 2 In furtherance of that goal, Dori s Muir wrote to He arst (the newssta

nd distributor) with instructions to remit all money from newsstand sales to Muir Cay man rather than Muir Tennessee even though Muir Tennessee had produced the magazines and was responsible for the debt incurr ed in producing the m

agazines. This shifting of income was similar to the technique the Muirs had used with Hearst new sstand revenues whe n they moved their operations fr om Canada to Tennessee. D

uring fiscal ye

ar 1994, Muir Cay

man received a total of $331,000.00 in newsst

and revenues for the

sale of magaz

ines for which Muir Tennessee rem

ained obligated to pay

the printing charges

.6 In 1995, Muir Tenne ssee filed a petitio n in straight bankruptc

y. Among the debts listed in the petition were the d ebt of Muir Canada t

o Ronalds, Muir Tennessee’s debt to Holladay-Tyler, and its debt to Judd’s. It is noteworthy that Judd’s charges inc

luded the printing of th

e 1994 annual, spring,

summer, and fall editions of Log Home Guide, even though the newsst and revenues for these issues were paid to Mu ir Cayman. W. Edward S outher, a certif ied public accountant

, investigated the financial dealings between Muir Tennessee and Muir Cayman, which revealed that between the f

iscal years e

nding July 31, 1991 a

nd July 31, 1994, a

total of $511,900.00 for consu

lting fees transfe

rred by Muir T

ennessee to Muir Cayman. The siphoning of the f unds of Muir Tennesse

e ultimately

drained its net worth. Combined with Hearst newsstand sales paid Muir Caym an as opposed to Muir Tennessee, Muir Cayman received $843,000.00 from fiscal year-end 1991 through fiscal year-end 1994. In 1994 alone, the Muirs transferred, by

consulting fees and H

earst paym

ents, a total of $436, 000.00 to Muir Caym

an, resulting in a $24 1,100.00 net loss as op posed to, according t

o Mr. Souther, what would have been a $200,000.00 profit for that year. II It is well settled i

n Tennessee that the

“corporate id

entity” will be disregarded where the evidence indicates that the corporation is a mere sham and observance of su ch corporate identi ty would work injustice. Fidelity Trust Co. v. Service Laundry Co ., 22 S.W.2d 6 (T enn.1929); Neese v. Firem an’s Fund Insurance Co., 386 S.W.2d 918 (T enn. App. 1964); Oak Ridge Auto R epair Service v. City Finance Co ., 425 S.W.2d 620 (T enn. App. 1967); Electric Power Board of Chatt anooga v. St. Joseph Valley Structural Steel Corp., 6917

S.W.2d 522 (T

enn. 1985); Schlater v. Haynie, 833 S.W.2d 919 (T enn.App. 1991); see also Anderson v . Durbin, 740 S.W.2d 417 (T enn. App. 1987) (corporate veil m

ay be pierced a

nd true owners held l

iable when corpora

tion is liable for debt but is

without funds due to som e misconduct on th

e part of the owners/directors

or officers); Murroll Gesellscha ft v. Tennessee Tape, 908 S.W.2d 211 (T

enn. App. 1995) (i

n an appropriate ca

se and in furtheranc

e of the ends of justice, a corporation and individuals owning all its stock will be treated as identical). In Gesellschaft, Jerry Teal was the sole owner of al l the stock of two corporations, Tennessee Tape, Inc. (“TTI”) , and Cellux Converters, Inc. (“CCI”). He exercised abs olute and active cont rol over the operati

ons of both corporations. Murroll Gesellschaft shipped its particular product to TTI, which then sold that product t

o CCI, which in tur

n customized the

product and sold it back to TTI. In 1993, Gesellsch

aft shipped $124,877. 24 worth of its produc t to TTI on credit. Shortly

thereafter, Mr

. Teal, the sole

shareholder and dir

ector of both TTI and CCI, directed TTI to give CCI a $400,000.00 rebate which included transferring $325, 000.00 worth of m erchandise to CCI for “pretextu al” consideration. Th

is transfer rende

red TTI unable to

pay its creditor

s, one of which was the plaintiff. After the issuance of the rebate to CCI Mr. Teal ceased drawing a salary

of $3,500.00 per m

onth from TTI

and increased his sa

lary from CCI from $2,000.00 to $5,000.00. He argued the justification for this transfer was that Tennessee Tape had purchased merchandise from Cellux at prices that were too low and f

or which Cellux had paid too much. A ccording to Teal,8

Cellux was entitled to a “rebate” of $400,000.00, which was partially satisfied by the transfer of $325,000.00 worth of merchandise. We held that the rebate was merely a “ pretextual consideration”, and that the shifting of funds f

rom one corpora

tion to another was r

elevant to the issue of piercing the corp

orate veil, statin

g: “The testimony of Jerry Teal shows uneq uiv ocally that he, as sole stockholder of Tennessee Tape, Inc., caused Tennessee Tape to transfer $325,000 in merc

handiseto Cellux Converter , Inc., his other solely owned corporation,

with on ly prete xtual consideration, thereby rendering Tennesse

e Tape, Inc. un

able to pay its

debts and enabling Cellux conver ters to more than doubl e his (Te al’s) sa lary. This dealing was clear

ly in fraud

of the creditors of Tennessee Tape, Inc., and justi

fied piercing t he corporate veils t o require both Teal and his other corporation to acco unt to plaintiff for t

he fruits of the fraudulent con version of assets.” Gesellschaft

is instructive here

because of the undisp

uted testimony

of the defendant, Do

ris Muir, that she a

nd her husband Allan M

uir were the sole owners and controll

ing officers of Muir

Canada, Muir Te

nnessee, and Muir Cayman, and exercised com

plete control and dom

inance over each of

these corporations. Doris Muir testified that she, as president of all three corporations, had t

he authority to e

nter into, ame

nd, and swap contra

cts between the three

corporations and thir

d parties without aut

hority or direc

tion from a board of

directors or any

document evidenc

ing the agreem

ent of one corporation to have i

ts rights altered in f

avor of the other. It was also undisputed that the def

endants used their co

ntrol over Muir Te

nnessee and Muir Cayman to h

ave Muir Tennesse

e pay “cons

ulting fees” to Muir Cayman in excess of $500,000.00. Furthermore, Doris Muir testified that she used her control over Muir Tennessee and Muir Cayman to alter the distributing contract between Hearst

and Muir Tennessee

to direct a total of

more than $300, 000.009

in newsstand revenues to be sent to Muir Ca yman with a

bsolutely no consideration to Muir

Tennessee. Thi s was accompl ished to the direct de

triment of Muir Tennessee ’s creditors and for the correlati ve benefit of the de

fendants who were then livi

ng in the Caym

an Islands. The Muirs were u

nable to demonstr

ate a lawful jus

tification for thei

r decision to require Hearst to send funds in the amount of $331,200.00 to them in the Caym

an Islands. Signif

icantly, Dor

is Muir stated that th

is action was in response to the initia

tion of legal procee

dings by Holladay

-Tyler “ to protect our assets.” The Muirs argue tha

t the consulting fees w

ere earned while

they lived in the Cayma

n Islands. This ar

gument cannot w

ithstand scrutiny , because Doris Muir ad mitted t hat the y were not actively involved in the magazine

from 1991 to 1993:

“ . . . I didn’t h

ave anything wha

tsoever to do with

the editorial of

the magazine. I didn’t even rea d it when it cam

e to Cayma

n. I didn ’ t even read it I was so sic

k of thelog ho me industry . Every issue in 1991 I didn’t even lo ok at.”

. . . . . “If the editor and th

e publisher of the magazine left and were at Cayman, someb od y had to have autho rity here, so we took a secreta ry, an executive secretary, and made her p ubli sher of the magazine because there wasn’t an ybody else to do it.”

. . . . . “ . . . by 1993 when I had to fire John Leeper then I had to take over and I had to work on it, but I wasn’t goi ng to give up living in Cayman.” There can be no doub

t that the consulting fe

es were corpora

te revenue out of which their printe rs should have been paid.10 The defendants ar

gue that the Chancel

lor erred in pierc

ing the corporate veil becau se there was no eviden ce of an int ent to defr aud their c reditors. We do not agree; the record reflects that the actions of the defendants were egregious to the extr

eme, and cal

culatedly so, i

n a blatant schem

e to defraud the printers. Revenues from

the 1993 production we

re diverted to the C ayman Isla nds under the plan devised

in 1990 and implem

ented in the summ

er of 1993. The Muirs’ testimony clearly reveal that they disregarded the corporate charter solely to enrich themselves personally. This fraudul ent intent is clearl y shown by the evidence.

Doris Muir, know

ing that suit had been f

iled to collect a deb

t which she admit

ted was a valid obliga

tion of Muir Tennessee, purposefully and willfully diver

ted its funds to another

corporation solely

owned, operated a

nd controlled by her

and her husband. Gary Piper, a C.P.A. who had been em ployed by the Muirs, testified regar ding the di versi on of f unds . He tes tifie d that the maj or sou rce of income for the Tennessee

corporation was ne

wsstand revenue fr

om Hearst, a

nd that he became alar

med when Mrs.Muir was consideri ng shifting the Hear

st revenue from Muir Te

nnessee to the Muirs i

n Cayman Islands. Piper wa s asked by Mrs. Muir to call Hear

st with instructions to

make the change , but was not comfortable i

n doing so, because he

believed that the shif

ting of this revenue would be detrimental to Muir Tennessee. It is significant tha

t the “consulting f

ees” paid from

Muir Tennessee to Muir Caym

an were substantia

lly in excess of t

he combined sala

ries of the defendants when the

y were actua

lly working for

Muir Tennessee.Accountant Souther testified that his review of the financial statements of all three11

corporations and the Muir’s tax returns revealed that the defendants received combined salar

ies averaging $70,00

0.00 per year

from 1988 - 1990,

years in which they we

re actually w

orking, while the c

onsulting fees from

1991 - 1994 averaged $144,000.00 per year. In summar

y, the record

is replete with evi

dence that the defe

ndants manipulated these corporations by transferring the debts of one to the other, diverting funds owed t

o one corporation to a

nother, and changing

the contractual rights of all three companies as they chose. Corporate action, as contrasted to individual action, was never taken. No corporate records were made. We agree with the appellees that it is abundantly clear from the evidence that the defendants m

anipulated all three

corporations as if n

one had any existence separat

e from them. When Doris Mu ir was asked about ho

w the right to publish magazi

nes and receive re

venues was transfe

rred between the se corpor ations she tes tified , rather signif icantl y: “I gave them the right in Canada, and I gave it to them in Tennessee, and my husba

nd and I decided it was tim e to switch our corp

orate headquarte

rs to Cayman. See, the thing you’ re not looking at counselor, is the fact that the owner of the m

agazine is sit

ting rig ht overthere [indicating Allan Muir], and wha t he produces he has the right to sell to anybody

in the world, and he’s entitled to the revenue as a result of what he pro duces.” Mr. Muir had a sim

ilar attitude. W

hen asked why he

was paid consulting fees by Muir Tennessee, he responded “because I own the com pany, and I was entitled to some dividends as a result of ownin g the company

. . . my role as the owner of three companies seems to be well, who is he? Forget about him. That seems to be the attitude I’m getting from these lawy ers here. They don’t seem to think I’m entitled to an y remuneration whatsoever.”12 The defendants’ admission that the various corporations

paid for their homes, telepho

nes and swimm

ing pools is additional sta rk evidence of the scheme apparent in this record. It is clear that these corporations were treated as mere shams for the sole benefit of the defendants to unlawfully enrich themselves at t

he expense of the cr

editors of the corpor

ations. III Defendants argue

that the Chancellor

erred in sustaining a

n objection by the plaintiffs to the introduction in evidence of a data compilation prepared specifically for this litigation. They argue that the compilation of evidence should have been allowed into evidence under Rule 803(6) of the Tennessee Rules of Evidence, which allows business rec ords as an exception to hearsay. In order to mee

t the requirem

ents of the rule, th

e record must b

e one made in the “regular practice of that business activity,” and it m ust have been “kept in the course of a regularly conducted business activity.” Tennessee Rules of Evidence 803(6). Thus, “an extraordinary report prepared for an irregular purpose,

particularly w

hen prepared with l

itigation in mind,

may not be made in the r

egular course of bus

iness and may

be inadmissible as a business record under 803(6) .” Neil P. Cohen et al,, Tennessee Law of Eviden ce, § 803(6).5 (3rd ed. 1995). The compilati

on sought to be entered i

nto evidence failed

to meet the requirements of the rule because it was produced spec

ifically in pre

paration for litigation, not in the regular course of business. Moreover, Rule 803(6) requires that the complication must have be en made “a

t or near the tim

e” of the event. Since the comp

ilation of records f

rom 1991 to 1993 wa

s made yea

rs after the fact, the Chance

llor properly e

xcluded it.13 IV The Chancellor de

nied pre-judgm

ent interest because “the defenda nts have no such liability to the plaintiffs until the entry of judgment hereon.” While it is true that the defendants had no liability until judgment was pronounced - a truism

applicable to any

litigation - we ca

nnot agree that this principle preclude s an award of inter est in accordance with T.C.A.§ 47-14-123. The amount of the obligations was always certain. The defendants had the use, albeit unla

wfully, of the

funds. To allow th

em to escape th

e payment o

f interest would thwa

rt the ends of justi

ce, especially

when their egregi

ous conduct is considered ; conversely, to deprive the judgm ent creditors of int

erest on their accounts would clearly be inequitable. We are not here dealing with an abuse of discretion in denying interest; we think the Chancellor merely utilized an erroneous basis for the disallowance o f interest. See, Newton v. Cox, 954 S.W.2d 746 (T

enn. App. 1997). Accordingly, the judgments w

ill be modified t

o allow interest at t

he statutory ra

te beginning Decem

ber 1, 1993. V In a similar ve

in, we think attorne

y fees should have

been awarded. The Chancellor was clearly justified in disregarding the corporate charter to hold the defendants p

ersonally liabl

e to the plaintiffs.As we have shown, the application Muir Te

nnessee submitte

d provided that “t

he applicant agree s to pay . . . reasonable attorney fees.” T his application was signed by Doris Muir, as President of Muir Tennessee; we know of no reason why, in light of the fact that the corporate shield is not available to the defendants, t

hey should not be onerated with attorn ey fees pursuant to thei r agreement. See, Childress v. Sullivan County Board of Education , 771 S.W.2d 411 (Tenn. App. 1988).14 With respect to H

olladay-Ty

ler, as heretofo

re shown, the def

endants executed a promissory note for the amount then owing, which was circa $250,000.00. They

signed this note in their

respective offic

er capacities, a

nd it is thus merely

recitative of a de

bt already evid

enced by an open a

ccount. But, and somewhat ironically, the note, unlike the account, provided for attorney fees in the usual wa

y, thus sealing t

he obligation of the de

fendants to pay th

e fees for the rea

sons above expressed. VI The Chancellor a

ssessed discretionar

y costs against the

defendants for the expenses incurred by

the plaintiff rela

tive to the testim

ony of the witne ss Souther. The def

endants claim t

hat since they st

ipulated the dollar a

mounts, the testimony of

Souther was unnecessary. We have read his testim

ony, and conclude that the pur

ported stipulation fa

lls far short of equa

tion. The Chancellor did not abu se his discretion in a warding these costs . Rule 54, Tenn. R. Civ. Pro. The judgment

, as modified,

is affirmed a

nd the case is rem

anded for all appropriate purpose s, including a deter mination of attor

ney fees incur

red by the plaintiffs, for trial and appeal. Costs are assessed to the appellants, for which

execut ion may is sue, if n ecessa ry.

_______________________________ William H.

Inman, Senio

r Judge CONCUR:

_______________________________ Houston M. Goddard, Presiding Judge15

_______________________________ Charles D. Susa

no, Jr., Judge