### IN THE COURT OF APPEALS OF TENNESSEE AT KNOXVILLE June 2000 Session NANCY D. BRACKEN, v. RICHARD EARL, d/b/a FINANC IAL SERVICES COMPANY Direct Appeal from the Circuit Court for Knox County No. 2-506-97 Hon. Harold Wimberly, Circuit Judge

FILED AUGUST 7, 2000 No. E2000-00202-COA-R3-CV

Plaintiff sued torecover m onies paid to defendant. Defendant defended on the grounds that the monies were paid to a trust fund for which he was not liable. The Trial Court held the trust had no validity and enter

ed judgment agains

t the defendant. W

e affirm.
Tenn. R. App. P.3 Appeal as of Right; Judgmen

t of the Circuit C

ourt Affirmed.

H E RSCHEL P ICKENS F RANKS , J., delivered the opinion of the court, in which H OUSTON M. G ODD ARD , P.J., and C HARLES D
. S USANO , JR ., J., joined.

Ch ristopher D. Heagerty, Knoxville, Tennessee, for Appellant Richard Earl, d/b/a Financial Services Company. David H. Stanifer, Tazewell, Tennessee, for Appellee, Nancy D. Bracken.

OPINION

In this action to recover monies placed “in trust and possession” of defendant, the Trial Jud ge entered judgme nt for plaintiff f

or the monies paid o

ver to defendan

t, plus interest. Defendant has appealed.

Plaintiff is an 82 year old widowed woman, and according to the def endant, Richard Earl, he is the managing dire ctor of Financia l Services Company

(“FSC”), a trust

domiciled in Arizona.-2- Defendant

met several times with plaintiff, posing an investment opportunity where the plaintiff would invest money with FSC that would be used to finance a treasure hunting venture in Florida. On July 13, 1993, plaintiff delivered to defendant a draft pay able to FSC in the amount of $50,000.00. On that date, plaintiff was given a promissory note, executed by FSC and signed by Earl, promising the repayment of the $50,000.00 on or before July 19, 1994 at the rate of ten percent per annum. On August 25 , 1993, plaintiff delivered another draft in the amount of $50,000.00 payable to FSC. Prior

to that day, on August 11, 1993, a second promissory note was executed by FSC and signed by Earl promising repay ment of $50,00 0 on o r before October 1, 1994. Plaintiff delivered anothe

r $10,000.00, in ca

sh, in October of 1 993 for investment in FSC.
Over a period of months, plaintiff received a total of $16,000 from Earl

and FSC in the form of seven payments of $400.00 and one pay ment of $13,200.00. When the payments ended in October of 1994, plaintiff began making inquiries abut the status of the repayments, and when she received no informa tion, she d emanded, th rough legal counsel, an accounting from Earl of the funds she invested, but to no avail, and she then brought this action.

The evidence at trial reveals that FSC was established in Arizona by John Michael Crim and R obert H. Kilgore on July 30, 1992. On the date the trust was created, Crim appointed Dana T. Houtz and Steven E. Duke as Trustees. Following the creation of the FSC Trust, defendant RichardEarl was appointed and elected to serve as managing director of the Tr ust and an Agreement andContract

was entered into between FSC and Earl. Earl testified that he accepted the position of managing director in late 1992 or 1993. His appointment is do cumented in

the undated minutes of an alleged meeting of the Board of Trustees. The minutes of the allege d meeting state tha

t t he trustees and Mr. E arl execu ted a contract for Mr. Earl’s employment which is “attached he reto.” There is no contract

included with the minutes or anywhere in the record. Ea

rl was asked at tr

ial if he had “some contrac t as to what [he] will receive [as compensation].” He stated that “Financial Services h as.” He testified that he had not received any money from the deal, but was to be p ai d “down the road on profits from the finds.”

The evidence establishes that Earl had complete control over the operation and management

of the “trus t.” As managi ng director, he was give n th e po wer t o bu y, se ll, con vey, re convey and en cumber any and all real property for the trust organization, along with the authorization to be the signatory on all accounts. He described his function as “to manage the affairs of F inancial Se

rvices Company” which consisted of “facilitating the loans, as well as pay ing the mon ey” in relation to the investment deal with the 500 Trust. There were noother functions of FSC that Earl was aware of, as the

Trust was only

created a few

months before Ea

rl became involve

d with it. Defendant is the only employee

of Financial Services Company, and does not have anyone wor

king for him. He t

estified that no on

e else has the authority

to sign any

thing on behalf on FSC other than himself.

During trial, defendant was unable to identify the trustees of the trust. When pressed-3-

for names, he stated that he believed that Michael Crim was one of the t ruste es. However, the documents

in the exhibits reveal that Crim is not a trustee, but was r

ather the “Crea

tor” of the trust who appointed H outz and Duke as tru stees and transf

erred the prope

rty of the tr

ust to the newly appointe d Board, and Crim w as released fr

om all duties and obl

igations associa

ted with the trust

. Defendant

was also unclear as to who w ere the beneficiaries, and said that the trust was its own beneficiary

because “it’s a contract unde r contr act law and it’s headed by its own entity.” O ther evidence establishes that defendant treated Financial Services Company as an extension of himself, in dea ling w ith an other inves tor, p laint iff’s daugh ter. In that case, defendant signed a note for the money personally, and not as manag ing director. After hearing

the evidence, th

e Trial Judge made

the following fin

dings:
I suppose this case really comes down to these two notes of $50,00 each. We introduced them as Exhibit 1 and Exhibit 3. . . The Defendant’s position about these notes here is that he is protected by

this entity called Financia

l Services Company

. He’s submitted the

se documents, some sort of form, a document which says down at the bottom copy righted in common law by the Commonwealth Trust Company. It’s a doc ument that has abou t the same validity as a mail order diploma, if that. There is no Financial Ser vices Comp any. It simply is the Defendant. . .
I don’t know about order ing an accoun ting. I don’t see in the Court’s view that these notes are valid or it makes an y differe nce what happen

ed to the money

, so the Court declines

to do that.
Our review of the factual

determinations in this case are de novo upon the Record of the Trial Court. T.R.A.P. 13(d). These fi ndings are pre

sumed tobe correct , unless the evidence preponderates against those findings. Campbell v. Florida Steel Corp. , 919 S.W.2d 26, 35 (Tenn. 1996); Knight v. Lancaster , 988 S.W.2d 172, 174 (Tenn. Ct. App. 1998 ). The e vidence preponderates that defendant had complete

control over the trust and that it was set up to protect defendant from liability.

There is a paucity of au thority in Te nnessee addres sing the issues ra ised by these types of trust arrangements and their use in avoiding individual liability. Our Courts have, however , addressed in similar circumstances under which a corporate entity may be disregarde

d and liability plac edon the individual. The controlling principles of this “alter ego” doctrine are set forth i n Electric Power Bd. of Chattanooga v. St. Joseph Valley Structural Steel Corp. , 6 91 S. W.2d 522 (Tenn. 1985):
A corporation, of co urse, h as an existence separate and distinct from that of the

owners of

its capital stock, but this separate entity may be disre garded upon the showing of special circumstances, such as, that the corporation is a sham or dummy-4- so that failure to disregard it would result in an injustice. (Citations omitted). The conditions under whichthe corporate entity will be disregarded vary according to the circumstanc

es present in eac

h case and the ma

tte r i s particularly within the pr ovince of the trial court. Moreover, a determination of whether or not a corporationis a mere inst rumentality

of an individual or

a parent corpor

ation is ord ina ril y a qu est ion of f act for the jur y. Id . at 526. The United States Tax Courthas dealt with severalcases in which co mmon law trusts similarto the one in this case were set up as a means of avoi ding individual tax liability. See Harrold v. Commissioner of Internal Revenue , 1991 WL 102700 (U.S. Tax Ct. June 17, 1991) affd. per curiam 960 F.2d 1053 (8th Cir. 1992); Estate of Yeoham v. Commissioner of Internal Revenue , 1986 WL 21641 (U.S. Tax Ct. Sept. 11, 1986) affd. per curiam 826 F.2d 11 (5th Cir. 1987).

The Courts have repeatedly held that such a “sham” req ui res the court to lo

ok not only at the organizational documents and surface transactions of the entities involved, bu t also at their “economic

realities.” See Frank Lyon Co. v. United States , 435 U.S. 561 (1978) ; Blueberry Land Co. v. Commissioner , 361 F.2d 93, 101 (5 th Cir. 1966) affg . 42 T.C. 1137 (1964) ; Weyl-Zuckerman & Co. v. Commissioner

, 23 T.C. 841, 847 (1955), affd. per curiam 232 F.2d 214 (9 th Cir. 1956).
One of the factors focused upon by the Tax Court is which per

son or entity

actually controlsthe earning of the income rather than who ultimately rece ives it. S ee Harrold at W L 102711. This incl udes who is the trust manager, who has signatory authority , and who keeps the records an d minutes. Id

. The Court also focuses on the role of the trustees and whether they ar e independent

or nothing more than “straw men,” allowing the manager co mplete and independent control over the property in the trust. See Harrold (citing Furman v. Commissioner , 45 T.C. 360 (1966) affd. pe

r curiam 381 F.2d

22 (5th Cir. 1967)).
In Trial Court’s findings that defendant has complete control over the assets of the trust and that the trustees are nothingmore than names on paper issupported by a preponderance of the evidence. T.R.A.P. Rule 13(d). Earl had unlimited and exclusive power to manage the trust and was solely resp

onsible for obtain

ing loans from inv

estors and then inv

esting with the tr

easu re hunting operations . The Trust ees are not involved at all with the day-to-day operation or the management

of the Trust, and defendant c ould not identify

who the trustees w

ere, and had had

little contact with any of them. There

are no records

of meetings othe

r than the alleg

ed meeting in

which Earl was appointed managing director. By the documents relinquishing all control over the trust to Earl by the trustees, they breac hed their duty asfiduciaries. We f ind no substance to

this so-called trust, beyond a means

for defendant to attempt to protect himself from liability when investing other people’s money

in risky vent

ures. The Trial Judge, in effec

t, found that defendant is the “alter ego” of the trust, and we agree that under all the circumstances the defendant is liable to

the plaintiff for the monies received.-5-

We affirm the judgment of the T rial Court and rem

and, with cost

of the appeal ass

essed to defenda

nt, Richard Earl.

_________________________ H ERSCHEL P ICKENS F RANKS , J.