### IN THE COURT OF APPEALS OF TENNESSEE AT JACKSON March 16, 2005 Session

CAPIT AL MAN

AGEMEN T PAR

TNERS v. WILLI AM J. E GGLESTO N, III
A Direct Appeal from the Chancery Court for Shelby County No. 99-0753-2 The Honorable Arnold B. Goldin, Chancellor

No. W2004-01207-COA-R3-CV - Filed July 7, 2005

Plaintiff-corporation

sued defendant, a stockholder, officer, a nd director

of a corporation engag ed inthe design and manufacture of ster eo speakers, to recover the amount due on loans made to the corporation allegedly

based on negligent and fra udulent misrepresentations of the defendant. The plead ings also se ek to pierce the corporate veil and hold the def endant personally

liable for the corporation

debts. The trial court found no fraud or misrepresentation on the part of the defendant and ente red judg ment for t he defe ndant. Pla

intiff ap peals. We affir

m. Tenn. R. App. P. 3; Appeal as of Right; Judgment of the Chancery Court Affirmed

W. F RANK C RAWFORD , P.J., W.S., delive red the o pinion of t

he court , in which A LAN E. H IGHERS , J. and H OLLY M. K IRBY , J., joined. Robert F. Miller of Memphis for Appellant, Capital Management Par tners

Jo hn R . Br ans on o f Me mp hi s fo r Ap pel lee Wi ll iam J. Eggl est on, III

OPINION

I. PROCEDURAL HISTORY

OnAugust 23, 1999, Cap ital Mana gement Partner s, a Minne sota Corporation, f iled its original complaint

ag ain st th e De fendan

t, Wi llia m J. Eggleston I II , in the Chancery Court of Shelby Co un ty, asserting claims for fraudulent misreprese ntation in a commercial transaction and neglig ent misrepresentations ina commercial transaction. On September 23, 1999, Eg gleston filed a motion to dismiss the

origina l complain

t. On May

1, 2000, Ca

pital Ma nage ment filed its amended complain t. On August 25, 2000, Eggleston filed his answer to the amended complaint in which he denied the substantive allegations and asserted various aff irmative defenses. He also filed a countercomplaint asserting he was entitled to money damages from plaintiff.1 Egg leston A udio , LLC , did no t app eal from the trial co urt’s adv erse ju dgm ent aga inst it.
-2- OnDecemb er 12, 20 00, the chancery court en tered a consent order to c onsolidat e two ca ses, pursuant to which th e instant c ase was consolid ated wit h Eggleston Audio, LLC v. William J. Eggleston, III

. On Oc tober 22, 20 03, C apita l Mana ge ment filed its answer to Eggleston’s counter complain t, deny ing its substantive allegations. On October 30, 2003, Capital Management filed its secon d amende d complai

nt in which

it added a claim stating that Egg leston acted as the alter ego of Egg leston Works and see king to pi erce th e corpor

ate veil. Eggleston filed

his answer to the second a mended c omplaint, d

eny ing the a llegat ions.

The trial of

the consolidated case was conducted from November 4, 2003 through Nove mber 7, 2003. After the trial, the parties submitted their proposed findings of fact and conc lusions of law. The cha ncery court ru led aga inst Capita

l Manag ement on a

ll counts. 1

II. FAC TS

This appeal arises from the collapse of Eggleston Works L oudspeaker Company (“Eggleston Works”), a Memphis -based f ir m th at manufactured high-end audio spea kers for a discriminating clientel e of audiophiles (person s who, ac cording to Merria m-Webster

Dictiona ry , are “e nthusiasti c about high-fidelity sound r

eproduction”). Eggleston Works was founded by William J. Eggleston, III (“Eggleston”), soon afte

r he left college. After a

few rocky

years, Eg

gleston Work s ultimately succeede d in gaining

the resp ect of th e audioph ile commun

ity f or the hig h quality of its spea

kers, whichreceived

rave reviews in a leading publication devote d to high-end audio equ

ipment. De spite this acclai m, Egg leston Works was nev er a pro fitable c ompany , and in 19 99, in the m idst of a dispute with Capit al Management Partners (“CMP”), Eggl eston filed for bankruptcy protection for Eggleston Works. Capital Ma

nageme nt Partne rs then sued Egg lest on for fr audulent misrepresentation in a commercial transaction and negligent misrepre sentation in a commercial transaction. Because the factual background of this case is complex and the sufficiency of the evi d ence is a

t issue, it i s necessa ry for us to r

ecite the history of Egg leston Works, as brou ght for th at tria l, in deta il.

A. 1992-199 4: Early y ears of Eggleston Wor ks Eggleston began building

speakers at the age of four teen as a hobb y th at he pur sued with h is father, the pioneering photographer William Egg leston. Eggleston testified that, whil e stil l in h igh school, he had ambitions of founding a company that wo uld mak e audio speakers. Eggle ston
a tten ded college at Boston University , Memphis State University, Georg etown University, and American University, but never e arned a college deg ree. While attend ing Georgetown in 1990, where he studied business, Eggleston had access to a woodworking shop an d u sed it to bu ild his fir st speaker, which he called “Entail,” that was designed

to look like furniture. Finding his process for building the Entail too arduous (it took nine months to complete the first set of speakers), Eggle ston turned to adesign that was easier to build, and in 1991 he

began talks with

a friend, Michae l Grant, about starting a speake r compan y to gether . Eggl eston expla ined his i dea for furniture-designed speakers to Grant, and proposed that they start a c ompany to make them. Eggleston sent Gra nt a pair-3-

of ped estal sp eakers and Grant “got re ally excited about them.” I n 1992, Eggleston and Grant became very ser ious about starting the company . In the summer of 1992, Eggleston and Grant moved to Memphis to s tart Eg gleston Works, inc orporat

ing in Te nnessee in the fa ll of 1992. Grant was the p rimary investor for the c ompany , investin g $50,00 0 initially

, but within

a y ear, he

had inves te d $200,000. In 19 92, Eggleston Work s was bas ed in a re

nted house

in Memphis, and Eggleston and Grant made a deal to trade speakers with the owne r of a woodworking shop in dow ntown Memp

his, inreturn for

the use of the sho

p to build sp eakers . Toward the end of

1992, Eg gleston

Works built prototypes of its speakers to take to the January 1993 Consumer Electronics Show (CES) in Las Vegas

. At the 1993 CES, Eggles to n Works signed up Peter McGrath, an important dealer in hig h-end audio equipment , as an Eggleston Works distributor, and shortly after the show the company was mentioned

in Ster eophile , a prestigious magazine catering to the audiophile community. Upon returningfromthe CES, Eggleston and Grant rented a shop a t 125 Talbot in Memphis, where they went to work filling their first order, placed by Peter McGrath.

At this time, the firs t half of 1993, Grant did all the accounting and bookkee ping for Eggleston Works, while Eggleston and his brother, Winston, worked in the shop. But after signing up Peter McGrath, who immedi ately sold a pair of Eggleston Works speakers, they had not signed up any more de alers. In the summer of 1993, Eggleston took to the road, renting a vanand visiting audio dealers across the country in an effort to persuade them to carry Eggleston

Works’ furniturestyled speaker s. Despite spending six weeks on

the road , Eggl eston fa

iled to sig n up a single dealer. But during his travels Eggleston did conceive of a new speaker design—“a c ompact floor-standing speaker that was very

expensive”—that he would call the “Andra” speaker

. In early 1994, Michael Grant

ceased being

actively involved in Eg gleston Works, but kept his ownersh

ip interest. Eggleston spent the first six months of 1994 designing the first prototype of the Andra speaker.

B. 1994-1997: The success of the Andra speaker In the fall of 1994, Eg gleston Works was preparing to debut the Andra speaker at

the CES to be held in

January 1995. Eggleston recruited Peter Mc Grath, the high-end audio dealer who ha d been Eggleston Works’ first distributor and who had de cided to l eave his store in Mi ami, to lead the Eggleston Works sale s team. Concerned about how Eggle ston Works would be able to fulfill any orders it might receive at the 1995 CES, Egg leston be gan ap proachi ng Memph

is banks in

an attempt to secure a Small Business Administration loan. At the January 1995 CES, Eggleston

Works signed up fifteen dealers who placed a total of $110,000 in orders, but Eg gleston Works had still notsecured
a loan. In Februa

ry 1995, National

Bank of Commerce in Memphis agreed to loan Egg leston Works $120,000, if a guarantor could be found for part of t he loan. Diego Winegartner, a friend of Eggle ston’s, agreed to guara ntee $100,000 of the loan in exchange for a set of spe akers and photographs by Egg

leston’s father. By

late spring, Eggleston Works had produce d eight or nine pairs of Andras. In the spring

of 1995, Eggleston testifi ed, th e company ha d “momentum” and had deliver ed a set of Andras to the reviewer for a n audio magazine, but lack of funds caus ed th e company to “stall” at the beginning of summer. During the summer, Eggleston went to Asia to seek-4-

investmentmoney

from his f

oreign distributors. At that

time, most employees of the ca sh-strapped Eggleston Works were defer ring their salaries.

Inthe fall of 1995, Eggleston had a discussion in New Yor k City with an old frien d a nd investmentbanker, Alex Bolen, about the possibility of Bolen and his friends ( the “Bolen Group”) investing approximately $300,000 in Eggleston Works. Eggleston secured a letter of intent from

the Bolen Group toinvest

$300,000. Between fall 1995 and July 1996, a favorable review of Eg gleston Works speakers by

a well-respected writer appea red i n an audio m agazine, and by July 1996, the Bolen Group had invested

$225,000 in Eggleston Works. Cash flow was still very tight; Eggleston Works occasionally missed its pay roll; and Eggleston was not alway s able to pay himself. Due to these ongoing financial problems, Egg leston spoke to Alex Bolen and Bolen’s colleague John Sabre (part of the Bolen Group) and they agreed to collectively

sign a letter of credit for $360,000—which Eggleston Works received at the end of 1996. This money went into operations of the c ompany. By the start of 1997, when the 1997 CES show was held, Eggleston Works had signed up
more dealers and di stributors, and the staff of Stereoph ile magazin e had en tered in to discuss ions with Eggleston Works aboutreviewing the Andra speaker . Eggleston testified that this review promised to boost the profile of

Eggleston Works considerably : “When I started my company, if y

ou had asked
me one goal I ha

d, it would be to be on the cover of Stere ophile.. .. If you got a g ood revie

w in Stereophile, you had

made it.” By

spring of 1997, Eggleston Works was shipping, in Eggleston’s estimation, around eight or ni ne Andras a month and Eggleston testified that the woodshop was operatingat maximum capacity. Egg leston Works was building speakers with the use of a computer numeric ally

controlled router (CNC router), a router that cuts wood according to plans that have be en input into a computer. The router used at that time had a lower c apacity a nd lower accuracy

than was ideal for Eggleston Works, and Eggle ston Works was receiving some complaints from customers about the workmanship in their speakers. I n the spring of 1997, Eggleston appr oached the Bolen Group, which had already invested $225 ,000 and signed a $360,000 letter of credit, about the possibility

of acqui ring a more acc

urate, h igher c apacity

router. They

origina lly settled on a budget of $30-$60, 000 for a

router, but Egg le ston and the Bolen Group ultimately se ttled on a $160,000 router, which Eggleston Works acquired by a lease-p urchase agreement. The Bolen Group guaranteed

the entire $160,000 cost of the router. I t became apparent that the ne w router was t oo large to fit in the Eggleston Works shop on Talbot Street, and as a result, Egg leston Works began looking f or a new space, a nd moved to

a building

on South Fr

ont Stree t in downtow

n Memphis.

Around this time, Eggleston and McGrath traveled to Santa F e, New Me

xico to meet

with the reviewer for Stereoph ile magazine. The Stereoph ile review, which Eggleston anticipate d to be positive, seemed l ikely

to boost the

company ’s profil e and inc rease s ales.

C. Fall 1997: Investment by Mike Sabre/Capital Management P artners

Inthe fall o f 1997 Eg gleston Works still h ad cashf

low proble

ms, and Eggl eston began speaking with John Sabre (of the Bolen Group) in an attempt to secure a loan for the company . John Sabre and other members of the Bolen Groupwere un willing t o invest any more funds in Eg gleston-5-

Works, but i

n late August or early

September of 1997, John Sabre p ut Egg leston in to

uch with h

is brother, Mike Sabre (“Sabre”), who had a f irm called Capital Manag ement Par tners in Mi

nneapoli s that invested money in small private compa nies. According to his own testimony at trial, Sabre was
a hi gh ly e ducated

and sophis ticated b

usinessma

n from the

inceptio n of his re lationship with Eggleston. He held an undergraduate deg ree in political science and economics from the Unive

rsity of Minnesota

and an M.B.A. from UCLA . Before founding Capital Manag ement, Sabre had worked for Apache Oil Corporation as a loan compliance officer; for a venture capital firm called Westwood Partners where he evaluated start-up firms in a var iety of fi elds; and for J.P. Mor gan, where his duties included preparing financial statements for the billion-dollar financing of a L atin American coal-mining ve nt ur e a nd ev al ua ti ng a h ea vy i nd us tr y bu si ne ss in Me xi co Ci ty that was see king to
move into new markets. During their initial conversations, Eggleston gave Mike Sabre background informationabout Eggleston Works, and Sabre aske d for a list of assets and other financial information, such as a cash flow statement. Eggleston testified that he told Sabre he “was not in a position to provide accurate information at that time,” an d that Sabr

e asked h im to “get me [Sabre] anything .... Give me some dir

ty numbers, anything , give me some idea of where we are.” Eggleston sent him a docu

ment cont aining f inancia l stateme nts and projections, reflecting Eggle ston Works’ negative cash flow. Sab re testified at trial that he was “pleasantly surprised with the detailed complexity

and thoro ughnes s of [Eggleston’s] n umbers.” Sabre al so got a U CC filing on the assets of the company, which would secure the loan. On October 7, 1997, Sabre funde d a loan of $75,000. Inthat same month, Eggleston Works had a negative cash flo w of $77,0 00, which , accor ding to Eggleston, was due to their efforts to catch up on shipping, master the new CNC router , and fulfill orders. In e arly

Decemb er of 199 7, Sabre funded a nother $7 5,000 loa

n to Egg leston Works.

Inlate November 1997, the Andra speaker was featured on a second Stereoph ile cover, t his time as “speake

r of the y ear.” F lyin

g high from this p

ublicity , Eggl eston Work s had an extreme l y successful trip to the January 1998 CES and

the company took numerous or ders for its products. But
soon after the January

1998 CES, Eggleston Works’ first interest check to Mike Sabre bounc ed, whichEggleston at

tribut ed to a vendor failing to hold a check that it had promised to hold for a period of time. In Februar

y Mike Sabre visited Eggleston Works to examine the co mpany’s operati ons. Eggleston testified that Sabre noticed the neg ative cash flow in the amount of $245,000, butthat he was happy

that Eggleston Works had closed out the year with sales of $826,879, a “good sales figure.” Egg leston testified that he and Sabre discussed the profit numbers and cash flow numbers i n the pre sence of

Tim Duffy

, a prospe ctive emp loy ee of Eggleston Works.

After Mike Sabre’s February

visit, John and Mike Sabre called Eggle ston and, a

ccordin g to Eggleston , inf

ormed him t

hat Eggleston Works (in Egg leston’s p araphr

ase at tr ial) “loo ks really good, but you have g ot administrative problems.” Eggleston testified that he ag reed with t

hei r assessme nt, and that he believed Eggleston Works would benefit from having a chief financ ial officer. Mike Sabre then

began traveling to Memphis on a weekly basis, an arrangement that excited employees

of Egg leston Works becaus e it promised to alleviate the “chaos” (as Eg gleston described it) that reig

ned in the company . Eggl eston expla ined, “it was total chaos in the business and it was explained to everyone

with the company that Mike wa s going to come onboard and he wa s going

to be doing the administrative stuff and I was g oing to focus more on what I do well and it was g oing-6-

to be awesome. I

was excited about it.” One of Sabre’s main tasks would be to resolve the question of who had an equity stake in the company. I

ndividuals with claims to stock in Eggleston Works included Eggleston, Michael

Grant, Eggleston’s brother Winston, the members of the Bolen Group, and Diego Winegartner.

D. Spring 1998: Conflict between Eggleston and Sabre

Aroundthe time he

entere d into the a

greement with Sa

bre in Ap ril 1998, E ggle sto n wa s working on a new speaker called the “Iv

y,” which he was desig ning as a refer ence spe aker for a wellknownmasterin

g eng ineer na

med Bob L

udwig. T he speak er would retail for $ 100,000 a pair. Eggleston testified that Sabre was opposed to the project and refused to allow

funds to go toward the development

of the Ivy, and refused to allow the new CNC router to be used in its construction. Eggleston built the speaker without using the CNC router. By May 1998, Eg gleston had refined the prototype and was ready

to make the first production version of

the speaker, but animosity be tween Sabre and Eggleston was mounting. Eg gleston testified that a fis sure beg an to divid e Sabre a nd those lo yal to him, and Eggleston and those loy al to him. On June 29, 1998, Sabre put $35,000 into th e co mp an y. Between June 30 and the end of July, 1998, Sabr

e put anot her $80, 000 into th e c om pa ny. (Betwee n June 29, 1998 and September 8, 1998, CMP loaned a total of $148,000 to Eggleston Works.) Eggle ston was o pposed to n

ew polici es being

implement

ed by Sabre in anapparent effort to run Egg

leston Works “more li

ke a business,” pol icies exem plified by

a lette r received by Eggleston from an audio dealer

who was offe

nded by the brusq ue trea tment he r

eceive d from Jim Thompson, the Eggleston Works accountant. Egg leston testified, “These werevery close personal relationships and Mike was ge tting in the way of my

relationships with these people and just setting a tone for the business that I didn’t think was conduc ive to drawing the revenues of the business.”

E. Summer 1998: Showdown between Eggleston and Sabre

InAugust, 1998, a meeting was held in New Yo rk Ci ty, attended by Eg gleston, Mike Sabre, and the Bolen Group. At trial, Egg leston contended that he called this meeting “because I

told the Bolen Group I couldn’t live with M ike any

more.” Sa

bre cont ended th at he called t he meetin g to address questionable expenses incurred by Egg leston. Prior to the meeting, Sabre sent Eggleston a memorandum

detailing the questionable expenses that he expected Eggleston to explain at the meeti ng. At the meeting, Eggleston responde d to Sabre’ s allegations by producing receipts and offering explanations for the questioned expenses. He produced documentation for the expens es in the form of

a three-ring binder (re ferred to at trial as “the black book”). Eg gleston failed to persuade those in attendance to force S abre ou t of the company, a nd the result of the meeting was that Eggleston’s role at Eggl e ston Works would henceforth be severely diminished—Eggleston was demoted to new produ ct devel opment t eam lea der; he w as not to a

ppear a t the factory

on a daily basis; he was to

cease a ll daily operati onal dec isionmakin g reg arding

sales, production, and finance; his salary was r

educed to $30,000 a y

ear; he was to transfer check signing a nd money transfe

rring rightsto Sabre; and various individuals were asked to waive their interest in stock of th e c om pa ny. Eg gl es to n w as to re ta in a 1 0% in te re st in th e c om pa ny.-7-

After the August meeting, Egg leston traveled to Europe to “reg roup” with a fr

iend. While inEurope, he testified, he did some work for E ggle ston Works—for example, he worked on the design for the Ivy , Jr. speaker and he “schmoozed” with an Egg leston Works distributor in France. During his time in

Europe, Eggle ston commu nicated with Sabre

via e-ma il. Eggleston returned from Europe in De ce mb er 19 98 . E ggl es to n p la nn ed to at te nd th e J an ua ry 1 999 CE S, but before parti cipat ing, he demanded that Sabre sign an agreement, drafted by

Eggleston’s attorney, resolving outstanding issues con cer ning Eggleston’s role in Eg gleston Works. Among other things, the agreement

freed Eggleston from non-c ompetition restrictions, gave Eggleston owne rship of his own inventions and innov ations, a nd set par

ameters for Eg gleston ’s contin

ued employme

nt with Eggleston Works as new product development team leader. Due to his neg otiations with Eggleston
over the agreement, Sabre did not sign the a greement until the last day of the CES, acco rding to Eg gl es to n. Th us Eg gl es to n o nl y pa rt ic ip at ed in th e s ho w f or a h al f- da y.
After the 1999 CES, Eggleston testified, he received several communications from Sabre, including a sixty -page

proposed agree ment that would

resolve the disputes between Eggleston and Sabre. Eggleston declined to sign this ag reement. In July

of 1999, Capital Management Partners sued Eggleston Works to obtain the assets of Eggleston Works. Egg leston then changed the locks at the Eggleston Works facility

on South Main, and he prepared bankruptcy paperwork without

filing it. There were brief settlement talks between Eg gleston, Mike Sabre, and the Bolen Group, but the talks fell through. On July 26, 1999, Eggleston filed for bankruptcy pr

otection for Eggleston Works, and the compa

ny c eased op eration s for thre e months.

InNovember 1999, Sabre purchased the assets of Eg gleston Works from the bank ruptcy trustee for $8,000 and went into business as Eggleston Audio, making high-e nd stereo speakers. As of November 4, 2003, the principal and interest owed on the loans by Capital Managem ent to Eggleston Works totalled $601,256.86.

The trial cou

rt ruled a gainst Ca pital Mana

gement on all cou

nts. The tr

i al court found that Eggleston had made

no misrep resenta

tions of ma

terial f act, and it furthe r found th at a

ny a lle ged reliance by CMP and MikeSabre sol ely on the financial statements provided by Eggleston was not
re asonable; therefore, the trial court held that Egg leston was not liable for frau dulen t misrepresentation. The trial court fur th er held that Eggleston was not liable for ne gligent misrepresentation, since he made no material misrepresentations of fac t and Sabre did not re asonably rely upon Eggleston’s financial statements. Finally , the trial court

held that CMP failed to present evidence that i t wasentit

led to pier ce th e cor pora te ve il of E

W.

III. ISSUES The Appe llant, Cap ital Mana gement Partner s, raise s the following issu es on app eal:

1. Whether

the trial court erred in apply ing the clear and convincing sta ndard of proof to Capital Management’s fraud cla im against Eggleston.-8-

2. Whether the trial court erred in finding that Capital Manag ement did n o t pre sent sufficient evidence to permit it to pierce the corpora te vei l o f Eggleston Works and thereby hold Eg gleston persona lly l iable fo r the deb ts of Egg leston Works.
3. Whether

the trial court erred in f

indi ng that C apital Ma

nageme nt failed to prove its claims for

fraud or negligent misrepre sentation against Eggleston.

IV. STANDA

RD OF RE VIEW Our standard of review in this non-jury case is de novo upon the record of the procee dings below and there is no presumption of correctness with respec t to the trial court's conclusions of law. Campbell v. Florida Steel Corp. , 919 S.W.2d 26 (Tenn.1996) and Tenn. R.App. P. 13(d). The trial court 's f actual findi ngs are, howev er, pre sumed to be c orrect and we m ust af firm s uch fi ndin gs absent ev id en ce pr ep on de ra ti ng to th e c on tr ar y. Union Carbide Corp. v. Huddleston , 854 S.W.2d 87 (Tenn .1993). We

further note that when

the resolution of the issues in a case depends upon the truthfulness of wit

nesses, the trial

judge w ho has the

opportuni

ty to observe the witne sses in the ir
manner and demeanor while testify ing is in a far better p osition tha n this Court

to decide

those issues. McCaleb v. Saturn Corp. , 910 S.W.2d 412, 41 5 (T enn.1995 ); Whitaker v. Whitaker , 957 S.W.2d 834, 837 (Tenn.App .1997). The we igh t, fai th, an d credi t to b e given to any wit ness's testimony lies in the first instance with the tri er of fact, and the credibility ac corded will be given great weight by the appellate court. Id. ; In re Estate of Walton v

. Young , 950 S.W.2d 956, 959 (Tenn.1997). However, in reviewing documentar y proof, " all impressions of weight and cre dibility
are drawn f

rom the c ontents of

the evide

nce, and not from

th e appearance of witnesses and ora l testimony at trial." Wells v. T

ennessee Board of Re

gents , 9 S .W.3d 779, 783-784 (Tenn.1999). As
a result, a ppellate courts may make

an independent assessment of the credibility of the docume ntary proof it reviews , without affording deference to the trial court's findings. See Corcoran v. Foster Auto GMC, Inc. , 746 S.W.2d 452, 456 (Tenn.1988).

V. ANALY SIS

1. Whether

the trial co urt err ed in applying the clear and convincing standard of proof to Capital Managem ent’s fra ud claim a gainst Eggle ston.

The first issue ra

ised by Capital Ma

nageme nt Partne rs on appe al is whet

her the t rial c our t erred in applying the

clear and convincing standard of proof to CMP’s fraudulent misrepresentation claim against Eggleston. CMP con t ends that the proper standard of proof is the preponde rance of evidence standard, and as authority for this contention CMP relies principally upon the ca se of Estate of Acuff v. O’Linger , 56 S.W.3d 527 (Tenn. Ct. App. 2001). In Acuff , another panel of this Court acknowledged

the prevailing state of

confusionunder Tennessee law concerning the proper standard of proof in fraudulent misrepresen ta tion cases, and we attempted to resolve the confusion by analyzing the opinio ns in which

the prep onderan

ce of ev idence s tandard

was appl ied in

fraud and misrepresentation

cases, a nd compar

ing them to simi lar cases in which the clear and convinc ing-9-

evidence standard was applied. This Court in Acuff (in a pas sage q uoted by CMP in its appeal brief) quoted with approval the following passage f rom an earlier opinion: [W]e believe the claimant asserting the tort of fraud and de ceit in an action for damages must only meet a preponde rance of the evidence burden of proof. We agree with this court's holding in Gentry v. Hi ll , ( no d ock et n o.) 198 5 Te nn. App . LEX IS 3180 at *6-11 (Tenn.Ct.App. Sept. 25, 1985) (no Tenn.R.A pp.P. 1 1 application filed), where, after r eview ing var ious hold ings on the applicable burden of proof and determining "about the only thing that is clear is that the rule to be ap plied is unclear," this court concluded "the pr eponderance of

the evide nce rule is the better one and will better serve the interests of justice." I d. at *8.

A number of

cases f inding th at frau

d must be pro ved by clea r and convincing evidence invo lve attem

p ts to set aside or reform a written instrument. See, e.g., Dickey v . N ichols , No. 01-A-01-9007-CH00260, 1991 WL 169618 at *5 (Tenn. Ct.A pp. Sept.4, 19 91) (no T enn.R.Ap p.P. 11 app lication f

iled) (" In or

der to justify reformation, the evidence of mistake or fraud must be clear and convincing "); Russell v. Zanone , 55 Tenn.App. 690, 704, 404 S.W.2d 539, 5 45 (Tenn.Ct.App.1966) (In a suit see

king to se

t aside a promissor

y no te and en

jo i n enforcement of a judgm ent based

on that note, the court reviewed the various descriptions of the applica ble sta ndard, including "clear and satisfactory" a nd "clear, cogent and convincing"). As this court has stated, such cases ar e not appl icable to a tort ca use of action for fraud and deceit where rescission of a d ocument o r instrument is not involved. Cava llo v. University of Tennessee , Memphis, No

. 01-A-01-9206-CH00210, 1992 WL 312620 at *4 (Tenn.Ct.App. Oct.30, 1992) (no Tenn.R.App.P. 11 application filed).

CMP maintains that, since it seeks onl y damage s from Eggleston and does not seek the re form or rescissi o n of a written instrument, the preponderance of e vidence standard is the appropriate standar d for its fraudulent misrepresentation claim against Eggleston.

Alth ough the law of Tennessee on this question is anything but clear , we conclude that under the rule set forth by this Court in Acuff v. O’Linger , the prep onderan ce of ev idence s tandard

must be applied in the case at bar. The clear and convincing standard

of proof is appropriate to those cases where a party se eks the reform or rescission of a written in strument d

ue to fraudul ent induc ement. But in all other

cases involving claims of fraud, the standard of proof is preponderance of evidenc e. It is true that some language in Russell v. Z anone , 404 S.W.2d 5 39 (Tenn . Ct. App. 1 966), the case primaril y relied upon b y Mr. Eg gleston, does appear to sugg est that the clear and convincing evidence standard of proof would be appropriate in a situation s imilar to the facts of the case at bar; however, the Court’s holding in Russell v. Zanone concer ning the proper s t andard o f proof i s ultimately

less than clear, with the court citing with approval the statement of the Tennessee Supreme Court, in the case of Williams v. Spinks , 7 Tenn. App. 488, 494 (Tenn. Ct. App. 1928), that “[t]he gener

al rule is that the e vidence to be sufficient to establish fraud should pro ve a stat

e of facts which is not fairly or re asonable reconcilable with fair dealing and honesty of purpose, a

nd which-10-

would lead a r easonab le man to the conclusion that fraud in fact existed.” Russell v. Zanone , 404 S.W.2d at 545. Alth ough we conclude that CMP is correct in its assertion that the proper standard of proof is th e prepon

deranc e of evid

ence sta ndard, w e conclu

de that th e trial c ourt’s sta tement tha

t “th e better approach is to require clear and c onvincing proof of fraud” constitutes harmless error. We note that, in its judgment, the trial court stated that CMP failed, under either the prepondera nce of evidence standard or the clear and convincing evidence standard, to prove its fraudulent misrepresentation

claim against Eggleston: “The Court finds that CMP has failed to prove its claim for fraud un der eith er stand

ard of pr oof.” B ecause

the Court f

ound that C MP failed

to prove i ts claim by a preponde

rance of the evidence, we a ffirm the judgment of the trial court on this issue.

2. Whether the trial court e rred in f indin g that Capi

tal Manage ment did n ot prese nt sufficient evidence to permit it to pie rce the corpora te veil o f Egglest on Works an d thereby hold Egglest on personal ly liable for

the debts o f Eggleston W orks.

The next issue CMP raises on appea l is whether

the trial court er red in hol ding tha

t CMP did notpresent sufficient evidence to permit it to pierce the cor porate veil of Eggleston Works and hold Eggleston personally

liable for the debts of Eggleston Works. The trial cour t held:

The Court fu rther fi

nds that CMP has not pre sented e vidence that it is e

ntitled to pierce the corporate veil of EW. EW was a legitimate company that was engaged

in the manufac

ture and sa le of stere o speake

rs. I t was prop erly

organ ized as a corporation

under Tennessee law, paid employ ees, taxes and vendors, manufactured, marketed and shipp ed its products, and was not used as a subterfuge in illegal transactions. It

had nearly

a million dollars invested in it be fo re CM P p ut in a p en ny. It had hundr

eds of dol lars in sa

les the y ears pr ior to and after the loans were made. I t also rec eived $935,000 from the Bolen Group in capital investments and loans b e fore the first loan from CMP, further proof that it was not an undercapitalized sham. See The Ocea

nics Schools

, Inc. v. Ba

rbour , 112 S.W.3d 135, 140 (Tenn. Ct

. App. 2003).

Inits appeal brief, CMP argues that piercing the co rporate veil is just ified in th

is case b ecause Eggleston Works “was a

sham thro

ugh whic h Eggl eston pur sued his pe rsonal in terests a nd goal s to the detriment of his creditors.” In its appeal brief, CMPenumerates the way s in which it contends Eggle ston Works w as a sham :

... Eggleston Works (i) was grossly undercapitalized; (ii) did not issue stock certifi cates; (iii) was used as an instrumental i ty of William Eggle ston; (iv) had corpora te assets (cash and the option to purchase the Building) diverted to Eggleston; and, (v) failed to maintain even the most basic of corporate f ormalities by having annual me etings o f direc tors and s harehol ders.-11-

Inhis appeal brief, Eggleston disputes CMP’s characterization of Eggleston Works as a sham or alter ego of Eggleston:
[T]here were many more fa cts, and more important ones, which favored Eggleston’s position: He kept track of salary he deferr ed when t he compa ny d id not have t he cash to pay him, vs. pe

rsonal e xpenses the

company paid in his behalf; EW was duly and properl y organized under Tennessee law, with a c harter and minutes; it had numerous
em ploy ees; it paid its employees, and paid taxes and vendors; it manufactured, marketed and shippe d its produ

cts all ove

r the wor

ld; and wa s n ot used as a subt erfuge for illegal transactions.... As even Mr. Sabre had to adm it, EW had ne arly
a million dollars invested in it before CMP put in a penny. At its peak, it had a dozen
or m ore emp loyees. I

t had its own books, and a bookkeeper (Mr. Thompson, who testified in Mr. Sabre’s behalf). I t had hundreds of thousands of dollars in sales during the year

s prior to and after the loans were made. Even Mr. Sabre testified that at one point, “orders were pouring in.” He himself to ld a reporter tha t he thoug ht it had “tre mendous po tential.”

In sh ort, EW was a booming, thriving business. To be sure, it had its problems; in the earl y days its own ers did not always f ollow strict corpora te practices—such as notholding formal meetings when it consisted only of two roommates in a rental house, or when one was peddling speakers from the back of a van; but that does not mean t

hat it had no separ ate existence from Eggleston, and was a total sham, as CMP was required to prove. (Internal citations omitted.) To resolve the issue of whether the trial court erred in refusing to pierc e the corpo rate veil of Eggleston Works, we turn to the ca se of The Oceanics Schools, Inc. v. Barbour , 112 S.W.3d 135 (Tenn. Ct. App. 2003), that was cited by the tria l court. In The Oceanics Schools , we set forth the criteria to be applied under Te nnessee law in

determining whether the corporate veil should be pierced. We stated:

A corporation is presumptively tre ated as a distinct entity, sepa rate from i ts shareho lders, officers, and directors. A cor poration’s separate identity may be disregarded

or “pierced,” however , “upon a showing that it is a

sham or dummy or where necessary to accomplish justice .” A corporation’s identity should b e disregarded

“with great caution and not precipitately .” The determination of whether to disreg ard the c orporat

e fiction depends on the special circumstances of ea ch case, and “the matt er is particu

larly within the province of the trial court.” “Genera lly, no
one factor

is conclu sive in determin in g wheth er or not to disreg ard a corporate entity ;” rather, the courts ty pically rely

upo n a c ombination of factors in deciding such an issue. The par

ty w ishing to pierce t he corporate veil has the burden of presenting facts demonstrating that it is entitled to this equitable relief.

Inaddressingthe issue

of pierc ing the c orporat

e veil, this court has relied upon the factors set forth

in Federal Deposit Ins. Corp. v. Allen , 584 F. Supp. 386 (E.D. Tenn. 1984):-12- Fact o rs to be considered in determining whether to disreg ard the corpora te veil include not only whether the entity ha s been u sed to work a fraud or injustice in co nt ra ve nt io n o f p ub li c p ol ic y, but also: (1) whether there was a fa ilure to c ollect pa

id in capi tal; (2) whether the corporation was grossly undercapitalized; (3) the nonissuance of stock certifi cates; (

4) the sol e owner ship of sto ck by one indivi dual; (5) the use of the s ame of fice or business location; (6) the employment

of the same employe es or attorney s; (7) the use of the corporation

as an inst rumenta lity or busine ss conduit for an i ndividual or another corporation; (8) the diversion of corporate assets by

or to
a stockhold

er or oth er entity

to the det

rim ent of creditors, or the manip ulation of assets and liabilities in another; (9) the use of t h e corporation

as a subterfuge in illegal transa ctions; (10) the formation and use of the

corpora tion to tra

nsfer to it the existing liability of another person or entity; and (11) the f

ailure to maintai

n arms len

gth relationships among related entities. (Internal citation s omitted. ) We conclude that the trial court did not err in refusing to pier ce the corpora te veil of Eggleston Works. I t is clear, in the evidence adduced in the voluminous record of this case, th at Egg leston Works was not th e alter e go of Eg gleston . While it is tr

ue that so me corpora te formalities were d i sregarded during the e arly y ears of Eggleston Works’ existence, the evidence tends strongly to show that Eg gleston Works was a leg

itimate c ompany

with an excellent product and was any

thing but a sham or alter ego of Eggleston. The high quality of its speakers was t outed twice in one ye ar on the cover of a prominent trade mag azine; Eggleston Works ’ cadre o f experienced

investors were given significant say in how the company wa s operated, to the extent that they were ev en co nsulted when the co mpany made a ma

jor equip ment purc

hase; one of these investor s, Mike Sabr

e, was br ought to M emphis to a

ttempt to so rt out the e quity stakes that various individua ls held in the company; at its heig

ht Eggleston

Works had a network of distributors selling its speaker

s both in the

United Sta

tes and a broad; a nd Eggl eston Work s had i ts own large manufacturing

facility in downtow

n Memphis. These fa

ctors str ongly suggest that the trial

court was
correct in refus ing to pie

rce the corpora te veil of Eggle ston Works. This issue is without me

rit.

3. Whether the trial court erred in finding that Capital Management f ail ed to prove its claims for fraud and ne gligent misrepre sentatio n against Eggleston.

CMP’s third issue on appeal is whether the trial cou rt err ed in find

ing that CMP failed

to prove its claims for fraud

and negligent

misrepre sentation

agains t Eggl eston. Th e trial c ourt set f orth its holding s on these

issues as follows: 7) InSabre’s initial conversation with Eggleston, Egg leston gave a description of himself and his company, and Sabr e’s br other was on the phone. Upon Sabre’s request fo r n um be rs th at re pr es en te d t he fi na nc ia l s ta te of th e c om pa ny, Eggleston-13-

produced a “Financial Statement and projections” repor tbased on sales for

the first
seven months of 1997 along with projected n um ber s fo r th e ba lan ce o f 19 97.

... In addition to providing the financial information, Eggleston also told Sabre about the product line produced, the dealers and distributors that he had, and the recent positive media exposure that the company’s products had rec eived. A ll these

were a ccurat e repres entation s. The only repr esentation that needs to be analy zed [is] whether or not the fina ncial sta tement contained m

isrepre sentation s of a mate rial fac t. 8) The Court finds that the financial statemen ts provided to Sabre by Eg gleston did not c ontain a misrepresentation of a material fact. The difference between Eggleston’s financi al statem ents and t

he fin ancial statemen

ts gene rated by Jim Thomps on—the document Sabre contends to have alerted him to EW’s financial situation—

is based on different but equally valid, a ccounting methods and not an attempt by Eggleston to conceal any financial information about EW. There was no misrepresentation of a material fact by Eggleston. The other claims made by Sabre that the leasehold improvements, option on the buildi ng a nd exp enses were not disclose d are lik

ewise wi thout meri

t. 9) M oreover, any alleg ed relian ce by CMP/Sabre solely on the financial statemen ts provided by Eggleston was not reasonable; indeed, by his own admission Sabre did not rely on them solely . This is evidenced by the facts admitted by Sabr e

... and is particularly tr

ue of as sophisticated a

person a s Sabre w

ho was in the privat

e investmentbusiness. He testified he had in mind a substantial number of positive and negative pieces of information about EW throughout the time he made the loans he complains of, and

the court is not persuaded that there was any

fraud, whatever the standard of proof. Even he admits that at some point, he knew enough that he cannot claim fraud; he is seeking no recover y for the a dvancements he made after the fall of 1 998; a nd yet he continued to pour f unds into EW and its successor, EA, up to the time of tr ial. 10) The Court furthe r fin ds that Eggleston is not liable for neglig ent misr epresent ation.... The Court finds that there were no material misstatements of fact, and that Sabre did not reasonably rely on Exhibits 6, 9 and 12 as set forth above. Inaddition, he did not t

ake rea sonable c are on hi s own to inv estiga te, despi te having had ample chance to do so. Therefore, CMP cannot prove its claim for

ne gligent misrepresentation.

a. The fraud claim

Withrespect to its fraud claim, CMP directs us to the principles we set forth in Anderson v. Warren , 2001 WL 1683810 at *3 (Tenn. Ct. App.), as a statement of the Te nnessee law governing suits for fraud:-14-

Inorder to

prevail on its clai m of fraud a gainst E ggle ston, Capit

al Manag ement must prove that Eggleston (i) made an intentional misrepre s entation with regard to a material fact; (ii) had

knowledge of the representa tion’s falsity, in that

he made the representation

e it her knowingly

or without belief in its truth or recklessly w ithout
re ga rd to its truth or falsity; (iii) that Capital Manage ment reasonably

relied on the misrepresentation

and suff ered da mages a s a

result of such reliance; and, (iv) that the misrepre sentation

related to an existin

g or pa st fact.

CMP insists that Eggleston’s conduct rose to the level of fraud under this standard. CMP contends that because Eggleston had take n business and accounting courses in colleg e, and had been trained to p repare financ ial statements in the format in which they were presented to CMP, he must have knownthat Eggleston Works had never made a profit in the five ye ars it had been in existence prior to seeking

loans fr om CMP. I

n light of Eggle ston’s bus iness tra ining, CMP argue s, the disp arity between the actual loss of Eggleston Works in 1996 (which CMP contends to have been $264,725.00), and the lo ss shown on Eggle ston’s 199 6 ye ar-end profit-a nd-lo ss statement ($23,887.00) must be considered an intentional misrepresentation, one that was material to CMP’s decision to make loans to Eggleston Works and upon which CMP reasonably relied.
Furthermore, CMP contends that Eggleston’s failure to inform Mike Sabre that

he reg ularly paid his personal expenses, and expenses for which there was insufficient documentation, from the company’s

coffers, constitu

tes a with holding o f informa

tion that rises to the lev el of fra ud. CMP states: “It strains credulity to believe that Eggleston did not know the true financial condition of

the Company which he had founded

and over which he had complete control. The financi al statem ents which he provided to Capital Management were false, and he must have known that fact.”

We hold that the trial court did not err in concluding that Egg leston did not make fraudulent misrepresentations to CMP. The record shows that Eggleston was a fle dgling entrepren e ur whose education in bu siness ma

tters was limited to a few semesters of business and accounting courses toward the en d of hi s abor tive c ollege career. Egg leston’s primary skill and interest wa s in designing speaker s, and by Sabre’ s own testimony, Eggleston Works sorely needed a seasone d business

person with financial acumen to help realize wh at S abre sa w as the c ompany ’s enormous potent ial. Both sides introduc ed testimony c oncerni ng the d isparity between the actual

loss sustained by Egg

leston Works in 1996 versus the loss stated on Eggleston’s 1996 financial stateme nts for Eggle ston Works. The overwhelmingweight of the testimony supports the trial court’s conc lusion that Eggleston made
no m aterial misrepresentations to CMP. At the relevant time, Eggle ston Works was a com pan y experiencing tremend

ous gro wth, due t

o favora ble public ity t

hat resu lted in increased demand for its products, and it seems clear from the evi dence that Eggleston’s alleg ed misstatement of the company’s loss may

have been

due either to differences in accounting methods used by

Eggleston and the compa

ny b ookkeep er, or du

e to Eggleston’s o

wn naivete conce

rning a ccountin g matte rs. Withrespec t to CMP’s cl aim that Eg gleston div erted compan y funds for his own bene fit, the evid ence in this lengthy transcr ipt does not support such claims. While it is true that Eggleston Works may have pa

id some of Eggleston’s personal expenses, it appears from the evidenc e that this arrangement

was necessitated by

the fact that Eggle ston had de ferre d his own c ompensat ion due to-15-

the financial challenges the company faced at various times. Under these circumstances, we cannot say the trial court er

red in re fusing t

o find that E ggle ston made materia l misrepr esentat ions to CMP.

Also important , in our vie w, is t he question o f relian

ce. Sabr e admitte d under c

rossexamination that he relied upon a panoply of information in addition to the financial statements that Eggleston supplied, in making his decision to loan money to Eggleston Works, and Sabre admitted he had discarded some of thi s material up on which he relied. Furthermore, g iven that Sabre was vastly more experienced in business matters than E ggle st on—with a lengthy resume including experience analy

zing and i nvesting instart-up

businesse s—it

strikes us as highly implausible that Sabre relie d upon Eggleston’s financial statements to the extent that he claimed. We note, for example, that Sabre seemed relatively unfazed by inciden

ts that wou ld seem to have been stark warningsigns of Eggleston Works’preca rious financial condition, such as the fact that Egg leston Works’ very first c

heck for interest on a loan was returned by the bank for insufficient funds. Under these circumst

ances, w e are sk

eptical about whether Sabre actually relied upon Eggleston’s representations concerning the financial condition of the company, and w e conclude that even if he did, the reliance would not have been

reasonable. The trial court did not err in holding that Eggleston did not commit fraudulent misrepresentation.

b. The neglige nt misr epresen tation cl aim

CMP further

contends that, if th e trial c ourt did no t err in co ncluding that Eggleston had committed

no fraud agains t CMP, then it

certain ly erred in failing to find that he had made negligent misrepre sentation s to it. As we stated in the case of Kinard v. Cook , 1991 WL 27378 at *3 (Tenn. Ct. App. Mar

ch 6, 1991 ), the el ements of neglig ent misre

present ation ar e set for th in§ 552 of the Restatem ent (Sec ond) of T orts: (1) One who, in the course of his business, profession or employ ment, or inany other tra nsactionin which he has a pecuniary interest, supplies false information for th e guidance of others and

their business transactions, is subject to liability for pec uniary loss caused t

o them by their justifiab le relianc e upon the informat ion, if he fails to exercise reasonable ca

re or competence in obtaining or communicating the information. (2) Except as s tated in

Subsection (3), the

liability stated in Subsection (1) is limited to losses suffered (a) by the person or one

of a limited group of persons for wh ose bene fit and guidance h e int ends to supply the information or knows that the re cipient intends to supply it; (b) thr ough reliance upon it in a transaction that he intends the informa tion to influence or knows that the recipient so intends or in a substantially similar transaction.-16-

Applying the elements of

neglig ent misre

present ation to the facts at bar, CMP argues that Eg gleston committed

neglig ent misre

present ation in the

following

way s:
There can be no question that E ggles ton was in the course of his business and involved in a transaction in which he had a pecuniary interest at

the time he provided the financi al statem ents to Capital Management and withheld information regarding his use of co mpany

funds for his personal benefit. Further, there can be no question that this infor mation wa s provide d to guid e Sabre and Capital Management reg arding the loans to Eg

gleston Works w hich C apital Management was contemplating, a nd that Capital Management suffered a pe cuniary loss as a result of its reliance upon that information. Capital Management further submits tha

t Eggl eston fa

iled to exercise
reasona ble care or competence in pre paring the fin ancial statements (and withholding fromCapital Management the fac t of the pa

yme nts by the Company

for his personal bene fit) so a s to render him liable to Capital Management for negligent misrepresentation.

We need not pr ovide exten sive analysis of this issue, beca use, as we stated in our discussion of CMP’s fraudul ent misre

present ation cla im, we con

clude tha t the tria l court did not err in concluding that Sabre did not rely

on Egg leston’s r

eprese ntations, and eve

n if he did so rely, such re liance w ould nothave been reasonable. We think the evidenc e support s the trial court’s conclusi on. Under

these circumst ances, it was pro

per for the trial court t o reject CMP’s claim for negligent misrepre sentation.

VI. CONCL USION

For the foregoing reasons, the judgmen t of the tr ial cour t is affir med. Costs i

n this appeal are assessed against the Appellant, Capital Manag ement Partners, Inc. a nd its surety.

__________________________________________ W. FRANK CRAWFOR

D, PRESIDING JUDGE , W.S

.