Court Opinion

ID: 1081852
Source: CourtListenerOpinion
Date Created: 2013-10-09 20:53:11.542479+00
Date Added: 2024-06-11T15:39:51.765007
License: Public Domain

JAMES R. TULLY, JR.,                     )
                                         )
      Plaintiff/Appellant/               )
      Cross-Appellee,                    )   Appeal No.
                                         )   01-A-01-9601-CH-00031
VS.                                      )
                                         )   Davidson Chancery
USA WIRELESS, INC.,                      )   No. 93-2020-II(I)
PMT INVESTMENTS, INC., and               )
PATRICK M. THOMPSON, in both             )
his individual and corporate capacity,   )
                                         )
                                                                 FILED
      Defendants/Appellees/              )
      Cross-Appellant USA Wireless,      )                       July 3, 1996
      Inc.                               )
                                                             Cecil W. Crowson
                                                            Appellate Court Clerk
                     COURT OF APPEALS OF TENNESSEE
                       MIDDLE SECTION AT NASHVILLE

APPEALED FROM THE CHANCERY COURT OF DAVIDSON COUNTY
AT NASHVILLE, TENNESSEE

THE HONORABLE IRVIN H. KILCREASE, JR., CHANCELLOR

LARRY D. ASHWORTH
ASHWORTH & HIGH
227 Second Avenue, North
Nashville, Tennessee 37201-1636
      Attorney for Plaintiff/Appellant

HUGH C. HOWSER, JR.
KENNETH M. BRYANT
TRABUE, STURDIVANT & DEWITT
Suite 2500, 511 Union Street
Nashville City Center
Nashville, Tennessee 37205
       Attorney for Defendants/Appellees
       Cross-Appellant USA Wireless, Inc.

                   AFFIRMED IN PART; REVERSED IN PART;
                             AND REMANDED

                                             BEN H. CANTRELL, JUDGE

CONCUR:
TODD, P.J., M.S.
LEWIS, J.

                                OPINION
             The issues in this appeal are (1) whether the chancellor erred in granting

a judgment against a corporation for back wages, (2) whether the chancellor should

have pierced the corporate veil and granted a judgment against the corporation’s

principal shareholder and (3) whether the court erred in dismissing the fraud claims

against the principal shareholder. We affirm the chancellor’s decision in part and

reverse on the fraud claims made directly against the principal shareholder.

                                          I.

             Patrick M. Thompson was the principal shareholder and president of

USA Wireless, Inc., a company he incorporated in February of 1990. James R. Tully,

Jr. worked for USA Wireless, Inc. for ninety-six weeks without compensation. On

November 22, 1991 Mr. Thompson sent Mr. Tully the following letter:

                    On August 15, 1990, you received your last payroll
             check from USA Wireless, Inc. At that time we told you that
             there would not be any more payrolls because funds were
             thin and prospects of financing were not immediate.
             However, we did say that you could continue to work at USA
             with the understanding that there would be no payroll until the
             company received funding. When and if that occurs, you will
             be paid for your services at an agreed upon rate per year as
             an independent contractor.

                    I am sorry to say that we have not been successful in
             securing the financing as of this date. As of November 1,
             1991, you will have completed 96 weeks of work without a
             payroll.    This means that USA Wireless owes you
             $158,000.00 for your services less your advances plus any
             approved expenses. Today the company has loaned you
             approximately $12,000.00 leaving a balance of $146,000.00.
             When and if the company receives a major funding of $2
             million dollars or is sold or liquidated, USA Wireless will pay
             you $146,000.00 within five days of receipt of the proceeds.
             Until that time you will be paid on an agreed upon
             commission schedule to be determined.

                     Not only do I look forward to paying you $158,000.00
             less your loan; I look forward to the day you resume your
             work as a salaried employee as you were before August 15,
             1990. It will mean that the company is properly capitalized
             and we are moving forward, making progress and benefiting
             all of our customers and employees.

                                          -2-
                    Rest assured that as long as I am in control of USA
              Wireless you will always have a position with this company.

                     Warm regards.

              On October 7, 1992, in an agreement signed by Thompson on behalf

of the company, USA Wireless, Inc. sold certain of its assets to Continental Wireless

Cable Television, Inc. for $950,000. When the company did not pay Mr. Tully he sued

(among others) USA Wireless, Inc. and Mr. Thompson. Against Mr. Thompson

personally Mr. Tully alleged that Thompson had falsely represented that if Mr. Tully

would continue to work for USA Wireless, Inc. he (Thompson) would pay for the work

and give Mr. Tully a twenty percent interest in the company. In a second amended

complaint Mr. Tully alleged that USA Wireless, Inc. was the alter ego of Thompson,

making him liable for the corporate debts. On cross motions for summary judgment

the court granted Mr. Tully a judgment against USA Wireless, Inc. for $147,000 but

dismissed the claims against Mr. Thompson individually.

                                          II.

              On appeal USA Wireless, Inc. argues that the letter of November 22,

1991 promised to pay Mr. Tully only if the company received two million dollars in

funding or was sold or liquidated. The company argues that the obligation to pay Mr.

Tully never arose because neither of these events happened.

              We think, however, that the company’s reliance on the conditions in the

letter is misplaced. First, the letter contains an unambiguous acknowledgment that

USA Wireless, Inc. owes Mr. Tully $146,000 for his past services. Second, the

language the company asserts is a condition precedent, we read as Mr. Thompson’s

promise to pay the debt as soon as the company was in a position to do so. There

is no indication in the record that Mr. Tully agreed to forego payment if the conditions

                                         -3-
in the letter were never met. Therefore, we think the chancellor properly granted Mr.

Tully summary judgment on the claim against USA Wireless, Inc.

                                          III.

              The corporate entity should be disregarded where it is a mere sham or

dummy, where it is being used to justify wrong or where it is used to protect fraud.

Neese v. Fireman’s Fund Insurance Company, 53 Tenn. App. 710, 386 S.W.2d 918

(1964). Whether a corporation is a mere instrumentality of an individual is a question

of fact, and the decision to disregard the corporate entity will depend on the

circumstances of each case. Electric Power Board v. St. Joseph Valley Structural

Steel Corporation, 691 S.W.2d 522 (Tenn. 1985).            The one seeking to hold

shareholders liable for the debts of the corporation has the burden of proving facts

justifying piercing the corporate veil. Schlater v. Haynie, 833 S.W.2d 919 (Tenn. App.

1991). In Schlater, we addressed some assertions of particular misconduct on the

part of corporate officers and concluded that so long as the corporate officers did not

use their control of the corporation for fraudulent purposes they had the right to treat

it as their own business enterprise, to favor a secured creditor over another (even

when it meant reducing the personal liability of one of the officers), and to organize

a successor corporation (with the infusion of new capital from one of the corporate

officers) to take up the business of the failed corporation. The key, of course, is

whether the assets of the failed corporation were fraudulently appropriated for the

corporate officers’ purposes. See 833 S.W.2d at 926-927. See also Tennessee

Racquetball Investors, Ltd. v. Bell, 709 S.W.2d 616 (Tenn. App. 1986).

              With these principles in mind, we are satisfied that Mr. Tully was not

entitled to summary judgment piercing the corporate veil of USA Wireless, Inc. The

facts in the record reveal that the company was organized by Mr. Thompson, who

procured a charter on February 27, 1990.           The company had eight original

                                         -4-
shareholders and Mr. Thompson, his wife Rita Thompson, and Nancy Cash served

as directors. Mr. Thompson supplied the start-up operating capital. Ms. Thompson

took no part in the company’s operation and, apparently, did not ever attend a

meeting of the board of directors. She did receive some payments of corporate funds

for her personal use, but these payments were accounted for on Mr. Thompson’s

ledger and the company received credit for the payments on the amount owed to him.

             When the corporation sold part of its assets for $950,000, the proceeds

of the sale were applied to the corporate debts -- admittedly including a partial

payment to Mr. Thompson. We do not think, however, that a finder of fact could infer

that any of the corporate funds were appropriated for fraudulent purposes.

             The remaining unanswered question, of course, is whether Mr.

Thompson was entitled to summary judgment on the assertion that the corporate veil

should not be pierced. While this is a closer question, we think the chancellor

correctly decided this issue as well. Again, the key issue is whether there are

controverted facts from which a trier of fact could infer that the corporate form was

used to defraud creditors or that the corporation’s assets were fraudulently diverted

for illegal or improper purposes. We find no evidence in the record to rebut the

corporation’s evidence that all of its assets were properly accounted for.

                                         IV.

             Mr. Tully also asserts that the lower court erred in dismissing the claims

he made directly against Mr. Thompson and PMT, Inc. for fraud and breach of

contract. The appellees did not address these issues in their brief and we find that

the evidence in the record is in conflict. Therefore, summary judgment on these

claims was improper.

                                        -5-
             The judgment of the lower court is affirmed in part, reversed in part, and

remanded for further proceedings in accordance with this opinion. Tax the costs on

appeal one-half to the appellant and one-half to the appellees.

                                         _____________________________
                                         BEN H. CANTRELL, JUDGE

CONCUR:

_______________________________
HENRY F. TODD, PRESIDING JUDGE
MIDDLE SECTION

_______________________________
SAMUEL L. LEWIS, JUDGE

                                        -6-